Reserve Bank may raise cash reserve ratio: Moody's

"With the recovery in its early stages, the Reserve Bank of India (RBI) is expected to refrain from hiking its twin policy rates this month," said Moody's Economy.com.
"However, at its October policy meeting, the central bank will signal to markets that it has adopted a tightening bias by raising the cash reserve ratio by 50 basis points," it added.
Moody's Economy.com expects RBI to begin raising its twin policy rates in the second quarter of 2010, with an initial 25-basis point rate hike.
"A gradual recovery in investment spending and real GDP growth will most likely necessitate gradual monetary tightening," said Nikhilesh Bhattacharyya, an associate economist at Moody's Economy.com.
"This will help remove excess liquidity that has built up in the banking system from strong capital inflows and deposit growth that has outpaced lending," Bhattacharyya said.
"The monetary policy statement is likely to indicate that the RBI will support lending growth to boost investment and infrastructure development," he added.
Moody's noted that while private consumption appeared to be recovering rapidly, businesses have been cautious about investing and taking on new loans.
As a result, it said, credit growth has been weak by historical standards, indicating a recovery in investment spending is still some months away.
"With recent surveys from the RBI and private firms showing business sentiment and access to credit has only recently begun to improve, low borrowing costs should encourage recovery in investment spending. Inflation concerns do not mandate monetary tightening at present," it said.
It also referred to accelerating food price inflation in recent months, and attributed it "to low agricultural output caused by the worst drought in over 30 years".
According to Moody's, excluding food prices, inflation is "fairly weak" compared with the rest of the region.
However, it added, the recent surge in food prices is likely to feed inflation expectations, which will need to be monitored over coming months as the labour market improves and wage negotiations take place.