India’s central bank could continue to take a hard position when it announces the credit policy on Tuesday (24 April), said some bankers, adding that the banking system still presented some opportunities to reduce money supply.
Citigroup and ICICI Securities, the investment banking arm of India’s largest private bank ICICI Bank, said the Reserve Bank of India (RBI) could announce some measures that would make the norms for external commercial borrowings (ECBs) by Indian firms a little more stringent than they are now. Here’s what a banking conglomerate, a foreign bank, a brokerage and a multinational investment bank expect the bank to do on 24 April.
HSBC: too soon to expect another rate hike
There is a need to continue (money-supply) tightening for some time. With wholesale inflation at 6.1% in the latest week and no sign of a slowdown in lending growth, we still anticipate another 50 basis points hike in banks’ cash reserve ratio (CRR, the balance banks need to maintain with the central bank). Having last raised rates at the end of March, it may be a bit soon to anticipate another hike at the 24 April meeting, but we doubt it will be delayed too long.
The annual policy statement will see the central bank forecast real GDP (gross domestic product) growth of perhaps 8.25%-8.75% in 2007-08 and a modest slowdown in the monetary aggregates. As a wildcard, we wouldn’t rule out RBI announcing a reduction in the current 5-5.5% target range for inflation as a further signal that it is serious about containing price pressures.
Citigroup: RBI may hold rates
While our macro forecasts have factored in one more rate hike, the timing is uncertain as RBI has been effecting frequent inter-policy measures. We believe that with inflation and bank credit growth both moderating, the bias should be for RBI to keep rates on hold. Moreover, monetary transmission works with a lag of around 18 months and RBI has hiked the repo rate (a key lending rate) five times in 2006-07, taking it to 7.75%. But there is a 50:50 chance RBI will hike its policy rates rather than waiting. Key justifications for this could be that inflation is likely to remain over its target range of 5-5.5% till the week ending 5 May, coupled with both money supply and credit running ahead of targets.
India’s forex reserves have touched $200 billion (Rs8.4 lakh crore) of which $47 billion has come in 2006-07. Therefore, we could see measures that could result in the tightening of ECB norms, reduction in interest rate on non-resident Indian deposits, etc.
While we expect only one more policy hike, we maintain that RBI will continue to use CRR—which has already been increased 1.5 percentage points from 5% to 6.5%—to keep liquidity tight on the back of intervention in the foreign exchange market. Not wanting to upset the growth momentum, it could lower the statutory liquidity ratio (SLR) of banks in the second half to ensure credit availability.
ICICI Securities: steps towards capital controls likely
Factors for and against the rate hike are evenly balanced. While inflation and index of industrial production (IIP) growth data for April (which are on the higher side) make a case for another hike, latest data on bank credit and money supply have shown an inflexion. Also, any further rate hike would follow too soon in the footsteps of the past hike on 30 March. The uncertainty on the monetary action will continue well into the next month unless RBI makes statements to the contrary or data trends cool off sharply, which is unlikely. Recent reports of below-normal monsoons and renewed surge in commodity prices are negative developments from the policy perspective. Apart from monetary measures, steps towards capital control, especially as regards ECBs, are widely anticipated in the light of the recent rupee movement.
Merrill Lynch: hawkish undertones to continue
Our economics team expects the central bank to keep rates unchanged. We think RBI could be willing to assess the impact of their recent accelerated tightening before deciding on further actions. However, we see no let down in the tone of the policy and expect it to remain hawkish.