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RBI may not take Fed cue on rates

business Updated: Sep 18, 2007 21:40 IST
MC Vaijayanthi
MC Vaijayanthi
Hindustan Times
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A possible interest rate cut by the US Federal Reserve, for the first time since mid-2003, is not expected to cast an immediate effect on the Indian market except for a sentimental impact on the bond markets.

"There are visible signs of the real sector slowing down in US. There may not, however, be an extended period of rate cuts as inflationary expectations are still there," said DK Joshi, Principal Economist at CRISIL.

An interest rate cut in the US will have a marginal impact on the domestic interest rate structure, as the Indian economy is still not integrated, Joshi said.

Economists are unanimous in their view that Reserve Bank of India would hold interest rates at the current level and there is no reason for the central bank to cut rates. The prime lending rate of banks is at around 12.75-13.25 per cent currently, up from 10-11.50 per cent range a year ago.

Economists said that if inflationary expectations continue and there is pressure on liquidity, the RBI could revise the cash reserve ratio — the money that banks have to park with the central bank.

"On the liquidity side, RBI could let up a little depending on further data," said A Prasanna, an analyst with ICICI Securities.

Though inflation hit a two-year low of 3.52 per cent last week, sharply down from a high of 6.69 per cent in January, rising crude oil prices and high food prices remain a matter of concern.

The markets have essentially factored in a cut of 25 basis points (bps). Depending on 25 or an aggressive 50 bps cut, some traders expect domestic markets could try to judge the state of US economy and fund inflows into India.

On Tuesday, the rupee strengthened by half a per cent, to Rs 40.48 a dollar on expectations of a Fed rate cut. A 50 bps cut is expected to bring in higher investment flows. "That would put upward pressure on rupee making liquidity flows crucial," said a foreign exchange analyst.