But RBI may raise lenders’ reserve requirement again
(MUMBAI) India’s central bank is expected to maintain steady interest rates in a quarterly review this week, but may ask lenders to set aside more cash as reserve to cut a surge in money supply, economists say.
They said the Reserve Bank of India (RBI), slated to announce its latest stand on interest rates this Tuesday at 0630 GMT, will likely sound less ‘hawkish’ on prices with inflation at a five-year low.
But economists say the central bank may act to ease the impact of billions of dollars from abroad flowing into the stock market and other investments in the fast-growing economy to ensure a slowdown in lending and a recent move to limit overseas fund stock market purchases takes effect.
‘Moderating inflation, easing credit growth and a slowdown in global growth will likely make the RBI less hawkish in its policy pronouncements,’ said Rajeev Malik, Asia economist with JP Morgan Chase bank, based in Singapore.
In July this year, the central bank kept its benchmark rate at a four-year high of 7.75 per cent in an effort to tame inflation.
The tight policy stance has had an impact with annual price rises now at 3.07 per cent, compared to 6.7 per cent in February, well below the 5 per cent upper limit targeted by the central bank.
‘We expect the RBI to keep key rates unchanged on Tuesday, with inflation and credit growth tapering,’ said Manika Premsingh, an economist with brokerage Edelweiss Capital.
Loans by banks have grown about 23 per cent in the current year ending March 2008, a slowdown from 30 per cent in the previous year as consumers shied away from higher interest rates for car, home and personal credit.
But analysts said despite that, a hike in the amount of money commercial banks must set aside as reserves – or the cash reserve ratio (CRR), currently 7 per cent – is likely as it would help cut the potential impact of a record of nearly US$18 billion invested in stocks by overseas funds this year.
‘I expect a CRR hike of about 35 basis points in the coming weeks,’ said housing lender HDFC Bank’s chief economist Abheek Barua.
Mr Barua said that a move by the Securities and Exchange Board of India (SEBI) last week to phase out the anonymous buying of shares by foreign investors would reduce some of the cash flowing into India, but the central bank may want to limit money supply aggressively.
JP Morgan’s Malik also expects a higher cash reserve requirement.
‘A hike in the cash reserve ratio cannot be totally ruled out if capital inflows continue to overwhelm the central bank,’ he adds.
Source: AFP (Business Times 29 Oct 07)
