'RBI TO LEAVE INTEREST RATES INTACT, MAY HIKE CRR'

Ravikumar.G , Last updated: 20 September 2007
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Unlike US Federal Reserves which cut interest rates by 50 basis points on Tuesday, the Reserve Bank of India is likely to retain the interest rates intact, global financial service provider Merrill Lynch said on Wednesday. The regulator, however, may ask banks to keep more cash with it, it added. "We do not expect the RBI to follow the US Fed in monetary easing as long as possible. Notwithstanding sub-4 per cent inflation, inflationary risks --high monetary growth, rising oil prices, high machinery price inflation -- are actually on the up," it said in an analysis. RBI is also unlikely to hike interest rates as this will feed further rupee appreciation, said the analysis, titled 'What Big Ben tolls for the RBI.' A higher rupee is beginning to threaten exports as well as the RBI's own balance sheet, the analysis said. The central bank is, therefore, likely to switch to quantitative tightening to sterilise excess capital flows, that will result from Asian "de-coupling", to maintain neutral interest rates to ward off inflationary risks. In order to further squeeze liquidity situation, the central bank may effect additional 50 basis point CRR hike, Treasury Bill auctions under the Market Stabilisation Scheme, and liberalisation of capital outflows. Cash Reserve Ratio (CRR) is the proportion of bank's deposits required to be maintained with the Reserve Bank. On the domestic demand front it said, "we expect India's strong domestic demand and diversified export markets to shield her from a US slowdown." Even software sector is better equipped to weather an US slowdown than earlier, it said, adding this reflects higher proportion of annuity revenues, greater non-US revenues and more moderate pricing.

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Ravikumar.G
(Consultant)
Category Others Report

'RBI TO LEAVE INTEREST RATES INTACT, MAY HIKE CRR'

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