Mumbai: India’s central bank is unlikely to raise its policy rates before it January review of monetary policy despite a sharp rebound in economic growth in the second quarter of current fiscal year, economists and banking sector analysts said.

Close watch: The Reserve Bank of India office in New Delhi. Analysts suggest the central bank may hike the cash reserve ratio. Harikrishna Katragadda / Mint

Economists said the low policy rate should continue for some more time, given the “anaemic" credit growth and low private sector spending.

The good gross domestic product (GDP) numbers, economists argue, is mainly because of stimulus packages the government and RBI initiated since the collapse of US investment bank Lehman Brothers Holdings Inc. in September 2008.

“The top priority for RBI has been growth. Both in October policy and subsequently, RBI has maintained that growth is fragile. The latest numbers suggest that the recovery is gathering steam," said A. Prasanna, chief economist, ICICI Securities Primary Dealership Ltd, a firm that buys and sells government bonds. “Of course, the upcoming IIP (Index of Industrial Production) and exports numbers will be watched closely for further evidence of a strong recovery."

India’s exports, although still down from the last year level, is recovering slowly with exports dropping 6.6% in October from a year earlier, the least drop in 10 months. It slid to 13.8% in September. Imports, on the other hand, declined 15%.

“We maintain our stance that a policy rate hike in January is a close call, as policymakers would most probably like to see definitive signs of recovery before raising lending rates," Standard Chartered Bank’s economists Samiran Chakraborty and Anubhuti Sahay said in a research report on Monday, after the GDP numbers were released.

The reaction of Subir Gokarn, the newly appointed deputy governor of RBI, was muted over the growth numbers. “While it is a recovery and it seems to be gaining strength, we should not ignore the fact that it is still being driven substantially by public spending," Gokarn told reporters on Monday in New Delhi.

Since last September, the government has offered three stimulus packages equivalent to 3% of GDP. RBI has infused about Rs4 trillion of liquidity through various policy measures. On Tuesday, banks kept Rs96,260 crore of their surplus with the central bank, whereas they were borrowing money from RBI during the crisis.

The wholesale price based inflation, which was at the negative territory for 13 weeks between June and August, has turned positive now. RBI in its October policy has also revised its inflation target upwards to 6.5% from 5% earlier.

However, a rate hike at this point will not help to curb inflation because “it is supply side driven and not because of excess domestic demand," said Bank of Baroda’s chief economist Rupa Rege Nitsure.

A rate hike at this time, when the developed countries are keeping their interest rates at near-zero, would in fact have negative effect for the country, said Nitsure. “RBI will be saddled with capital flows problem if they increase the rates now," she said.

International investors, seeking higher yields, are pumping their money into emerging markets, including India. As of date, foreign institutional investors have bought $15.4 billion (Rs71,610 crore) in Indian equities against selling $12.2 billion in 2008.

Any rate increase will see these yield seeking investors flooding the market with dollars which needs to be moped up by RBI to keep the domestic exchange rate stable, a must for export competitiveness.

“The credit demand is still anaemic, we are seeing credit demand from projects which have directly benefited from the stimulus packages," said Nitsure.

According to RBI data, credit growth till the first week of November, in the banking system is at a 12-year low at 9.8% against 27.7% a year earlier. RBI has revised its credit growth target to 18% from 20% earlier and many banks have revised their targets at 15% from around 25% a year ago.

“The fiscal stimulus is likely to continue in the next few quarters as there is still lack of adequate surety on the growth momentum if the fiscal stimulus is withdrawn," Kotak Mahindra Bank Ltd chief economist Indranil Pan wrote in a report. The coming borrowing programme, Pan argued, will be “at least as large as in this year" (Rs4.51 trillion), limiting the scope of withdrawing liquidity from the system. Incidents like the Dubai World “is likely to make all central bankers once more cautious of curtailing the liquidity in the system," Pan said.

Terming the growth as being in an “incipient stage", ING Vysya Bank Ltd’s economist Deepali Bhargava said RBI would look for firmer signs of growth in private consumption and investment before its steps in to withdraw stimulus. “We have been expecting that the rates could be hiked in January. With Monday’s numbers the conviction has increased. We expect a 50 basis points hike in both cash reserve ratio and policy rates," said Prasanna. One basis point is a hundredth of a percentage point.

Rajeev Malik, head, India and Asean economies, Macquarie Securities, said shrinking liquidity measures probably be announced in December or January followed by a policy rate hike in April after the Union budget. “It is better for RBI to work on liquidity than to hike policy rates anytime soon," said Malik in a note released on Monday.