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Business News/ Politics / RBI unlikely to tinker with key policy rates
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RBI unlikely to tinker with key policy rates

RBI unlikely to tinker with key policy rates

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Mumbai: The RBI is unlikely to tinker with key policy rates in its first quarterly review of the annual credit policy on Tuesday, as either a reduction or increase in rates would disturb the optimum level of liquidity in the economy.

Although food prices are on the higher side, inflation has been in the negative terrain since June on base effect and is not likely to influence the central bank’s decision on rates.

RBI in its annual policy announced in April had slashed short-term lending (repo) and borrowing (reverse repo) rates by 25 basis points each with a view to easing money supply.

The repo rate was reduced to 4.75% and reverse repo to 3.25%, while it retained the other key ratios such as the Cash Reserve Ratio (CRR), the percentage of depositors money that banks keep with the central bank.

RBI has, since the collapse of US investment banker Lehman Brothers last year, cut repo and reverse repo rates by 425 basis points and 275 basis points, respectively. It has slashed CRR by 400 basis points.

Following the various initiatives taken by the government and the Reserve Bank, the economy has started showing signs of recovery.

During the first quarter, the six core infrastructure industries posted a growth rate of 4.8% against 3.5% in the same period a year ago.

At the same time industrial growth continued to be in the positive zone with factory production expanding by 2.7% in May, showing signs of recovery in the economy.

However, the monsoon is still 24% less than normal resulting in fall in sowing areas of some of the major crops.

As part of the pre-policy consultations, RBI governor D. Subbarao met Prime Minister Manmohan Singh and finance minister Pranab Mukherjee on Friday.

Bankers and analysts felt that any cut in key-rates at this juncture would serve no purpose as already there is surplus liquidity in the system.

A still low demand for credit might also prompt RBI to maintain a status-quo in its key rates, bankers said.

“There is enough liquidity in the banking system. Even though, they may keep a headroom to lower CRR, any cut is unlikely in the current policy. It may leave repo and reverse repo rates unchanged," UCO Bank’s chairman and managing director S.K. Goel said.

Given the difficult market conditions, RBI may relax the NPA norms for stress-ridden sectors and may extend the deadline for loan restructuring, Goel said.

Bank of Baroda chief economist Rupa Rege Nitsure said, “RBI may lower the credit, deposit targets for banks as it is difficult to meet those in the prevailing conditions."

In its annual monetary policy, the central bank had set the credit target for banks at 20% and deposit base at 18%.

Any change in key rates is unlikely in view of excess liquidity in the system, Nitsure said.

Even Macquarie Research in a note said, “We expect it to be a ‘do-nothing´ policy, as RBI has already put aggressive easing in place, but it is still early to either begin withdrawing liquidity or to hike policy rates."

In line with the consensus, Goldman Sachs, too, said that RBI would keep all rates unchanged.

“There is significant excess liquidity in the system, broad money growth has been relatively steady at about 20% year-over-year, well above the central bank’s forecast of 17%," Goldman Sachs India chief economist Tushar Poddar said in a note.

Poddar said the real challenge for RBI is to continue the boost to aggregate demand in the near term, while withdrawing the large liquidity injected into the system to contain inflationary pressures in the medium term.

Goldman Sachs said RBI would move from a sole focus towards boosting demand, giving more weight to inflation.

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Published: 27 Jul 2009, 03:34 PM IST
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