The Telegraph
Since 1st March, 1999
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Money control seen in neutral gear

Mumbai, May 16: Will he stress it explicitly or only send pointers towards a neutral stance in the monetary policy due on Tuesday' That is the crucial question nagging bankers whose eyes are glued to one man — Reserve Bank of India (RBI) governor Y. V. Reddy.

Though the answers are not known, there is almost complete unanimity that the central bank chief will leave key interest rates, which includes the bank rate, cash-reserve ratio (CRR) and repo rate, where they are. This will be a break from a three-year policy of soft bias.

Though many agree that the governor is likely to opt for a neutral stance, given the fact that global interest rates are firming up and that there may be a pick-up in domestic credit, bankers and bond market analysts are keen to see how Reddy will express this stance.

Says Sanjeet Singh, vice-president of ICICI Securities: “Though we are expecting a neutral stance, it will be interesting to see how this is communicated by the governor. Reddy will be aware of the impact in financial markets when he makes any comment on this issue.”

It is this impact on the markets which observers feel could prompt the governor to only send pointers on how the central bank’s policy on interest rates is taking a neutral shape, away from the soft bias seen so far.

The indicators, bank watchers say, could range from Reddy citing signs of rising interest rates in the US, the robust growth rates projected for the economy and the possibility that inflation could be higher this year.

The soft bias has kept the bank rate — the interest that banks pay the RBI when they borrow from it — at 6 per cent, the lowest in more than three decades. On the other hand, the repo rate and the CRR are at 4.5 per cent.

The CRR is seen to remain unchanged due to the ample cash with banks. Bankers are aware of the widely held perception that interest rates have bottomed out. So, the present levels could hold for the next six months too. In such a scenario, the RBI is expected to keep interest rates steady to boost investment.

Expectations that the US interest rates will rise over the next few months were heightened last month when the Federal Reserve signalled a shift towards a hike in the cost of money. Its Open Market Committee, while assuring that deflation no longer posed a risk to the economy, made it clear that a rate rise will come at a measured pace.

Analysts expect the RBI governor to forecast a GDP growth rate of 6.5-7 per cent and an inflation of 5-5.5 per cent this year.

H.N. Sinor, chief executive officer of the Indian Banks Association, said while Tuesday’s policy is not likely to see any monetary measures, the Reserve Bank chief could address qualitative functioning of banks and underscore the need for tighter prudential norms.

Usually presented in April, this time the central bank chose to present the lean season policy after the elections. There were apprehensions in financial circles that the policy could be delayed since the new government was not in place.

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