RBI may keep interest rates steady for now

RBI may keep interest rates steady for now
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First Published: Wed, Jan 23 2008. 01 01 AM IST
Updated: Wed, Jan 23 2008. 01 01 AM IST
India’s central bank is expected to keep interest rates steady next week, but a global markets rout may prompt it to ease policy for the first time in four years, as soon as in April, a Reuters poll showed on Tuesday.
All 17 polled analysts predicted that persistent price pressures in Asia’s third largest economy would persuade the Reserve Bank of India (RBI) to keep rates on hold at its first rate review of the year.
“We are not out of the woods yet as money supply is still running above RBI’s estimates and the inflation risks are on the upside,” said Sujan Hajra, chief economist at Anand Rathi Securities.
But tumbling world stock markets and comments by the central bank governor that more weight will be given to recession worries in the US in reviewing policy, raised the spectre of monetary easing later this year.
RBI governor Yaga Venugopal Reddy said on Monday the risk of a US recession will be an important consideration at next week’s policy meeting as the global outlook is now more uncertain than a month ago.
“I think we will pay considerable attention to that subject and the monetary policy statement will take note of it,” he told reporters.
The comment triggered speculation among bond traders that the central bank may cut rates already next week.
But analysts doubted the monetary authorities would act so fast and attributed a drop in the 10-year bond yield on Tuesday to its lowest in a year to money moving from wobbly stocks to safe-haven bonds rather than market bets on a rate cut.
“With the extent of the global slowdown uncertain and risk of financial contagion still high, policy moves will likely err on the safe side,” said Han-Sia Yeo, strategist at Bank of America.
Yet, 11 analysts forecast a first rate cut since August 2003 in coming quarters, with five expecting a reduction in April.
The central bank last raised its benchmark short-term lending rate by 25 basis points to 7.75% in March, ending a drawn out tightening campaign to prevent the economy, which continues to expand at around 8% per year, from overheating. But it continued to raise the level of deposits banks must keep with the central bank, lifting the cash reserve ratio by 250 basis points since December 2006. It last raised the ratio by 50 basis points in November.
Two analysts in the poll expected RBI to raise the ratio by another 25 basis points next week while five analysts forecast more increases later.
Reserve ratio increases should help mop up excess liquidity and help keep prices in check after inflation hit a four-month high of 3.79% in early January, boosted by high global oil and food prices.
The poll was conducted before the Fed announced a 0.75% rate cut late on Tuesday evening (India time).
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First Published: Wed, Jan 23 2008. 01 01 AM IST
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