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RBI set to pinch rates, but with care

It is clear that Reserve Bank of India governor Duvvuri Subbarao will tighten money supply somehow in his annual policy review on Tuesday.

india Updated: Apr 19, 2010 21:04 IST
HT Correspondent

It is clear that Reserve Bank of India governor Duvvuri Subbarao will tighten money supply somehow in his annual policy review on Tuesday.

The question is by how much, and with what instrument at his command. But bankers say they may not take the RBI’s cue and raise commercial lending rates.

With overall inflation at 9.9 per cent for –end-March breathing at double-digit levels, he could go in for a hike in the repo rate — the rate at which the banks borrow RBI and the reverse repo — the rate at which the RBI borrows from the banks — by 25 or 50 basis points each. One percentage point equals 100 basis points.

The cash reserve ratio (CRR) — the minimum cash that banks must with the central bank — which is currently at 5.75 per cent may also see an increase of 25 basis points.

Experts say while a hike in rates seems imminent, the RBI policy is expected to ensure that the resurgent growth story is not affected as credit growth is yet to pick up.

Any significant hike in interest rates could also boost capital flows, which could further strengthen the rupee.

RBI, in its macroeconomic survey released on Monday, projected the economy to grow at 8.2 per cent in the current fiscal, a tad lower than the 8.5 per cent expected by the Centre.

It said wholesale price-based inflation would moderate over the next few months. It said stronger global commodity prices could worsen inflation. RBI estimates growth in 2009-10 at 7.2 per cent.

Finance minister Pranab Mukherjee has said inflationary pressures will persist until June.

Whatever the policy rates, bankers who have enough cash to lend may not be in a hurry to follow the RBI’s signal.

“There is sufficient liquidity in the system and there is no need to go in for an immediate rate hike, even if the RBI increases policy rates,” M.D.Mallya, chairman and managing director, Bank of Baroda told Hindustan Times.

T.M. Bhasin, chairman and managing director, Indian Bank, echoed the sentiment. “Liquidity is likely to be comfortable for the next two-three months and therefore there is no immediate pressure on banks to increase interest rates,” he said.

While RBI had cut rates through 2009, it made it clear last January that an accommodative policy to tide over a local slowdown and a global financial crunch was over.

Industry bodies such as the Confederation of Indian Industry and the Associated Chambers of Commerce and Industry of India (Assocham) have urged the central bank not to go in for any aggressive rate hike.