RBI unlikely to lift rates soon despite strong growth

RBI unlikely to lift rates soon despite strong growth

Mumbai: The Reserve bank of India (RBI) will not raise interest rates by the end of 2009, according to a new Reuters poll, and only one-third of economists surveyed predict a rate hike by the end of January despite unexpectedly strong growth during the September quarter.

Of 31 economists polled, all expected the RBI to tighten at least one of its two policy rates by the end of April, and most expect the central bank to tighten liquidity before raising rates.

“The context of weak credit growth amidst very high liquidity does not warrant a rate action at this point of time. Liquidity tightening ought to precede any rate tightening," said Shubhada Rao, chief economist at Yes Bank.

Economists who also participated in a poll after the RBI’s policy review on 27 October as a group now found it slightly less likely that the RBI would tighten rates by the end of January.

On Monday, India said the economy grew an annual 7.9% in the September quarter, far above forecasts of 6.3%, driven by government stimulus spending, manufacturing and services and a farm sector that performed better than expected.

That has helped send bond yields to three-week highs on a market view the RBI would tighten sooner rather than later.

An expected decline in farm output, however, may curb growth in the December quarter, and analysts said the RBI would prefer to wait to see growth momentum in coming months before tightening rates.

None of 29 analysts with a view expected the central bank to raise its repo rate, at which it lends short-term funds to banks, or the reverse-repo rate by the end of December.

Of 30 economists with a forecast, 9 expected the RBI to raise the repo rate by the end of January, when the central bank holds its next quarterly policy review; 10 of 30 expected an increase in the reverse repo rate, the bank’s short-term borrowing rate, by the end of January.

All but two of 31 analysts polled expected a rise in the repo rate from 4.75% by the end of April, with respondents split on whether the rate would rise to 5% or more.

The 31 respondents were unanimous that the reverse-repo rate would be increased from its current 3.25% by the end of April, with a small majority expecting a one-notch rise to 3.5% and the rest forecasting a rise to 3.75 or 4%.

By comparison, nine out of 20 analysts polled after the RBI’s October review had expected the central bank to raise its repo rate by end-January, and all expected at least one increase in both the central bank’s benchmark rates by the end of April.

RBI governor Duvvuri Subbarao said last week that since the global crisis, the reverse-repo rate has replaced the repo rate has the effective policy rate.

Liquidity Tightening First

Australia, which raised interest rates for the third month in a row on Tuesday, remains the only Group of 20 economy to tighten rates as the global economy recovers, with India and South Korea seen as leading candidates to follow suit.

Before raising rates, the RBI is widely expected to increase the cash reserve ratio (CRR) , the proportion of deposits banks must keep with the central bank in reserve.

Of 29 economists responding, 5 expected an increase in CRR from its current 5% by the end of December, 25 of 30 expected an increase by the end of January, and 27 of 29 forecast a rise by the end of April. By then, CRR could be lifted to as much as 7%, economists said.

India’s main wholesale price index inflation was a moderate 1.34% in October from a year earlier, but is expected by economists to raise to as much as 8% by the end of the fiscal year in March, fuelled by high food prices which tend to be beyond the scope of monetary policy.

“The problem is still food price inflation," said Abheek Barua, chief economist with HDFC Bank.

“If they want to exit their accommodative policy gently, then they can start with liquidity measures and move on to a rate hike," he said.

In October, the RBI withdrew emergency liquidity measures and increased some loan provisioning requirements, but left its key policy rates unchanged.