RBI may raise inflation forecast: Goldman Sachs

RBI may raise inflation forecast: Goldman Sachs
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First Published: Mon, Jul 27 2009. 01 39 PM IST
Updated: Mon, Jul 27 2009. 01 39 PM IST
Mumbai: The Reserve Bank of India (RBI) may raise its inflation target for end-March 2010 from 4% at its first quarterly policy review on Tuesday while leaving interest rates unchanged, Goldman Sachs said in a note on Monday.
The RBI’s review will, as a result, give more weight to inflation, compared with its previous focus on purely boosting demand, it added. Goldman Sachs expects inflation at 6.5% by end-March 2010.
The central bank has already cut the repo rate, or its key short-term lending rate, by 425 basis points to 4.75% in six steps since October 2008 as it tried to guard a slowing economy against the global financial crisis.
”Our expectation is that it (RBI) will start raising rates by early 2010,” it said adding that it may not indicate its thinking on the exit policy now.
The RBI may keep its growth projection for 2009-10 unchanged at 6% as the positive stimulus from the election and fiscal spending is balanced by the negative impact of a poor monsoon.
The RBI may cap the amount banks can put in its reverse repos the window, encouraging banks to keep short-term deposit and lending rates low, it said.
Loan growth has slowed to an annual rate of around 16%, nearly half the 28% pace in November and below the RBI’s 2009-10 target of 20%, according to fortnightly data released by the RBI.
State-run banks have reduced rates by only 150-200 basis points, less than half the cuts made by the RBI.
Goldman Sachs ruled out further rate cuts, given huge excess cash in the system, steady growth in broad money, narrowing credit spreads which are at pre-September levels and an uptick in inflation.
However, the real challenge for the RBI will be to boost aggregate demand in the near term, while withdrawing the large liquidity injected into the system to contain inflationary pressures in the medium term, said Goldman.
The government plans to borrow Rs2.99 trillion in the first half of 2009-10 which means that two-thirds of its borrowing will be completed when credit demand remains slow, and there is excess liquidity in the system, it said.
However, as there is considerable space in the the RBI’s own balance sheet to absorb government paper, financing of the deficit in FY10 should be comfortable, Goldman added.
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First Published: Mon, Jul 27 2009. 01 39 PM IST