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Central bank to keep interest rates unchanged

Central bank to keep interest rates unchanged
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First Published: Sun, Oct 28 2007. 01 23 PM IST
Updated: Sun, Oct 28 2007. 01 23 PM IST
AFP
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 RBI is slated to announce its latest stand on interest rates this Tuesday and will likely sound less “hawkish” on prices with inflation at a five-year low.
But economists say 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% in an effort to tame inflation.
The tight policy stance has had an impact with annual price rises now at 3.07%, compared to 6.7% in February, well below the 5% upper limit targeted by the central bank.
“We expect the RBI to keep key rates unchanged on Tuesday, with inflation and credit growth tapering,” Manika Premsingh, an economist with brokerage Edelweiss Capital, told AFP.
Loans by banks have grown about 23% in the current year ending March 2008, a slowdown from 30% 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 7.0% -- is likely as it would help cut the potential impact of a record of nearly $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.
Barua said 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,” Malik adds.
The new regulations primarily concerned participatory notes, which had allowed foreign investors, such as hedge funds, to buy Indian shares without revealing their identity.
The notes are to be phased out within 18 months in the regulator’s bid to boost transparency. Another worry for the central bank on the inflation front is surging global oil prices, especially for India, which imports nearly two-thirds of its petroleum needs.
India’s economy expanded at a faster than-expected 9.4% in the year ended March 2007 and 9.3% in the first quarter, April to June, of the current year. In July, the central bank reaffirmed an earlier forecast that full-year growth would slow to 8.5%.
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First Published: Sun, Oct 28 2007. 01 23 PM IST