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Rate hike chances fading, say economists

Analysts feel that home and personal loans may be spared an additional interest rate burden, reports BS Srinivasalu Reddy.

business Updated: Apr 19, 2007 21:48 IST

Having cracked the whip a couple of weeks ago on inflationary expectations, runaway credit and money supply growth, Reserve Bank of India Governor Dr YV Reddy is unlikely to ratchet up interest rates on April 24, when he reviews the credit policy, economists feel. If these expectations are proved right, home and personal loans may be spared an additional interest rate burden.

However, given Reddy’s penchant for throwing up surprises, economists say he might shift focus to foreign exchange inflows, considered to be the root cause for high inflation. At the most, he is expected to tinker with the reverse repo rate (the rate at which banks park overnight money with the RBI) and not the repo rate (at which they borrow from the RBI).

In its latest action against inflation on March 30, the RBI hiked the repo rate by 0.25 percentage points to 7.75 per cent and the cash reserve ratio (part of bank deposits mandated to be kept with the RBI) by 0.5 percentage points.
“The RBI is unlikely to do anything, having done this only recently. Even circumstances do not warrant any such action this time around,” said Subir Gokarn, executive director and chief economist of CRISIL.

However, he said the apex bank might impose some restrictions on external commercial borrowings by companies as part of controlling foreign exchange inflows. “The RBI may try to deal with external capital inflows directly, they being the root cause of excess liquidity, leading to higher inflation. This could be done by imposing curbs on external commercial borrowings.”

Foreign currency inflows get converted into rupees on entry, increasing the money in circulation. This, in turn, causes higher demand and price rise.

Indranil Pan, chief economist of Kotak Bank, said, “We do not expect anything from this policy. The recent CRR hike will come fully into force only by April 28. Anyway inter-policy changes still remain an option.”
Though the balance of trade is negative, the balance of payments, which include foreign currency flows from Indians abroad, is sustaining the dollar inflow.

Sachchidanand Shukla, Economist at Enam Securities, cites five reasons why the RBI is expected not to take any major measure. Money supply, which was one of the worries, seems to have subsided. Growth in home loan disbursals, which is said to have led to asset price inflation in the sector, is also moderating. Any rate hike may be politically incorrect with several states going to polls in the next 12-18 months. Besides, a rate hike is set to impact the Centre’s borrowing programme, exposing gaps in fiscal targets.

“Inflation, which is the cause of many monetary measures recently, is set to ease. The base effect may set in during the first week of May and bring down the inflation rate to below 6 per cent, taming the demon,” Shukla added.

Since September 2006, the RBI has raised the reverse repo rate by 1.5 percentage points to 6 per cent, the repo rate by 1.75 percentage points to 7.75 per cent, and the cash reserve ratio 1.5 percentage points to 6.5 per cent.