The Telegraph
Since 1st March, 1999
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Rate hike threatens to steal RBI thunder

Mumbai, April 1: The Reserve Bank of India is unlikely to tamper with the key rates in its annual policy statement for 2007-08 on April 24, following its flurry of initiatives last week to tame inflation.

With the RBI hiking the cash reserve ratio (CRR) by 50 basis points to 6.50 per cent, the repo rate by 25 basis points to 7.75 per cent and reducing the interest of banks on the CRR balances, bankers feel the annual policy statement may be a non-event.

The central bank has increased the repo rate by 150 basis points since October 2005 and the CRR by a similar margin from December last year. It has also raised the reverse repo rate by 150 basis points since October 2004.

The CRR hike by 50 basis points each on three occasions has sucked out nearly Rs 43,000 crore from the banking system.

In December 2006, the RBI had hiked the CRR to 5.50 per cent and followed it up with a 25-basis-point increase in repo rate during its third-quarter review on January 31.

In its annual policy review, many bankers expect the RBI to leave the repo and reverse repo rates unchanged.

A repo rate is that at which the RBI lends to banks and the reverse repo is the rate at which it mobilises funds from banks. A senior official from a leading private sector bank sums up the reasons as to why RBI governor Y.V. Reddy will not raise rates on April 24.

The banker feels RBI’s tight-fisted approach of recent months is yielding results after a period when banks ignored the RBI’s directives to put a leash on credit.

The final blow to the banks was the rate hikes last week which appear to have quashed any possibility of liquidity going up from this month.

“The credit growth, particularly on the retail front, is seen to come down for 2006-07. This is one factor. The other is that inflation could start easing from the end of April due to the base effect,” he added.

The banker said the concerns about crude oil prices were largely on account of tensions between Iran and the UK. “They could soften once the row is settled,” he added.

However, a dim outlook on inflation has led another section of bankers to forecast a 25-basis-point hike in both the reverse repo and the repo rates.

“It’s now certain that inflation for 2006-07 will be higher than the RBI’s estimates. But for 2007-08 too, the rate of inflation could be well over the 6 per cent mark to begin with. This could compel the RBI to raise rates,” says a treasury chief with a nationalised bank.

Economists like Rupa Rege Nitsure from Bank of Baroda are also concerned about the outlook for inflation.

Nitsure said the prices are looking up in essential manufactured goods such as steel, while the situation on foodgrains will depend on the rains.

Market circles are also keeping an anxious watch over the RBI. The stock markets are expected to open sharply lower on Monday in response to the RBI rate tweaks. Brokers feel shares of all types will suffer though the impact will be on the banking and auto stocks.

“The RBI action has come at a bad time for the markets. It is untimely and there will be negative reactions on Monday,” said Dhiraj Sachdev, vice-president and fund manager with HSBC.

Sachdev feels that since interest rates will continue to look up in the near term and peak out only later during the year, equities could stay soft.

“With interest rates rising and banks hiking deposit rates, many investors, particularly retail ones, will increasingly put their money into banks and not invest in the stock markets which have become volatile,” an analyst added.

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