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RBI set to maintain tight monetary policy: analysts

RBI set to maintain tight monetary policy: analysts
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First Published: Sun, Jun 03 2007. 02 41 PM IST
Updated: Sun, Jun 03 2007. 02 41 PM IST
By Salil Panchal/Reuters
Mumbai: India’s central bank is likely to keep monetary policy tight in the coming months to tame prices after the economy expanded at a faster-than-expected 9.4% in the year to March, analysts said.
While key interest rates, at a four-year high of 7.5%, may remain stable, analysts said the Reserve Bank of India (RBI) will ask banks to set aside more cash as reserves in order to cut the amount available to lend for homes, cars and other goods, in order to cool the economy and prices.
Inflation in India has declined from levels well above 6% earlier this year to a ten-month low of 5.06% for the week ended 19 May, official data showed on 1 June.
But that is still above the central bank “tolerance zone” of 4.5-5%.
“Inflation easing is largely due to the base effect,” economist D.K. Joshi Crisil told AFP.
“We expect the RBI to maintain a stance of tightening monetary policy. Growth has been strong. The bank needs to ease the demand side of prices.”
The faster-than-expected growth reported last week means the central bank and the government may revise upwards forecasts of 8.5-9% growth for the year started April, said analysts, who have also or are ready to revise higher.
“We expect firmness in growth to continue into fiscal year 2008. If strength in credit growth and industrial production numbers is reflected in the first quarter, we could revise upwards our GDP growth forecast of 8.2%,” said Manika Premsingh, economist with brokerage Edelweiss Capital.
India’s industrial production grew a record 12.9% in March, from the same month a year earlier, with April data to be released this month.
Morgan Stanley Asia-Pacific has already revised a conservative gross domestic product forecast higher.
“Domestic demand has slowed only marginally despite tightening measures by the RBI. Hence we are revising up our GDP growth forecast for fiscal 2008 to 7.7% from the 7.5% previously,” analyst Mihir Sheth of Morgan Stanley, said in a note to clients.
The RBI has raised short-term lending rates twice in 2007 and has also hiked twice the amount of cash that commercial banks must hold on deposit. This figure now stands at 6.5%, almost double the level from three years ago.
But despite the tightening, demand for services, goods and industrial commodities such as steel, cement and metals has stayed strong and prices have gained.
Offsetting high commodity prices worldwide is a stronger rupee against the dollar.
The local currency has gained 9% against the dollar since the start of the year to a near decade high of 40.50, which has helped bring down the cost of major imports such as crude oil.
But the currency’s gains come on the back of strong capital flows -- largely through foreign direct investment and overseas fund flows -- that bring a flood of money into the country, which is blamed for driving prices higher.
Foreign direct investment into India was a record $12.2 billion for the year ended March and the government has set a target of $30 billion for 2007-08, trade minister Kamal Nath said recently.
The cash from abroad has also sparked major gains in the stock market.
India’s benchmark 30-share Sensitive Index, at 14,570.75 last Friday, is near its all-time high, having risen 95% since January 2005 on overseas investments of $22.7 billion in the same period.
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First Published: Sun, Jun 03 2007. 02 41 PM IST