Sunday, April 19, 2009

POLICY PREVIEW - RBI unlikely to tinker with interest rates

A s the Reserve Bank of India (RBI) prepares to unveil its annual mone tary policy on Tuesday, most bankers are veering around to the view that India’s central bank will leave key interest rates unchanged, preferring to save its ammunition for another day.

Wholesale price inflation rapidly heading towards zero is seen by some analysts to have given RBI the room to cut the repo rate, at which it lends short-term money to commercial banks, and the reverse repo, its borrowing rate, to bolster credit growth. The Wholesale Price Index rose 0.18% in the 12 months to 4 April. But, while the central bank is expected to maintain its accommodative policy stance, it will likely not tinker with policy rates or lower banks’ cash reserve ratio (CRR) at this point in time, according to bankers such as M.D. Mallya, chairman and managing director of Bank of Baroda.

“With ample liquidity in the system and definite signs of a pick-up in the non-food credit during March and April, I expect RBI neither to cut the policy rates nor the cash reserve ratio in the upcoming monetary policy,” he said.

Between 20 October and 4 March, RBI governor D. Subbarao has cut policy rates five times, but left them untouched in both the October and January policy reviews.

On 4 March, the repo rate was lowered by 50 basis points to 5% and the reverse repo by an identical margin to 3.5%.

One basis point is one-hundredth of a percentage point.

CRR, the proportion of de posits that banks have to maintain with RBI, has been cut by 400 basis points, from 9% to 5%, since October.

RBI’s quantitative easing during October-January has already created stable conditions in the money and credit markets and lowered the effective cost of borrowing for both companies and individuals, said Mallya.

Liquidity in the banking system is ample, as evident from the fact that since the beginning of the fiscal, commercial banks have been parking in excess of Rs1 trillion in overnight funds with RBI, availing of its reverse repo window.

“I find the liquidity in the system to be excess, as is evident from the amount of funds banks are parking with the RBI,” said Satish Gupta, chairman and managing director of Kolkata-based United Bank of India.

Gupta, who says RBI will likely hold interest rates unchanged, expects the central bank to discourage commercial banks from parking their excess liquidity with RBI.

A Reuters poll last week showed that analysts are almost evenly split over whether the central bank would cut its key rates on Tuesday. Also last week, 10-year bonds had their best week in three months on speculation RBI would slash borrowing costs.

“There seems to be no reason for a cut in policy rates as lending rates are already down at acceptable levels for the borrowers,” said Romesh Sobti, managing director and chief executive of IndusInd Bank Ltd. “It is expected that RBI will take a wait-and-watch stance and spell out the policy direction on addressing growth issues,” he said.

The only concern for RBI at this point is “to divert excess liquidity flowing into the reverse repo counter back into the system towards productive and economically sensitive sectors”, according to Sobti.

RBI could lower policy rates by another 25 basis points, but the chances are that it may opt for status quo in the April policy, said Madan Menon, inter im country executive at ABN Amro Holding NV’s India unit.

He also expects another round of loan restructuring to avoid a sharp increase in banks’ non-performing assets.

RBI has already allowed banks to restructure loans that may turn sticky because of borrowers’ inability to repay in the current economic downturn.

Restructuring such loans would mean that banks don’t have to set aside money to cover the risk of default.

Any rate cut may come only in the middle of 2009, said Neeraj Swaroop, regional chief executive (India and South Asia) at Standard Chartered Bank.

“Against the backdrop of mixed macro data, stable financial markets, ample liquidity and improved sentiments the economic compulsion to deliver a rate cut immediately is less,” said Swaroop.

RBI should stick to its dovish stance, consider an increase in the interest rate ceiling on non-resident Indian deposits and raising the $3 billion limit on foreign institutional investment in government securities, said Gunit Chadha, managing director and chief executive of Deutsche Bank AG’s Indian operations.

“While some macro data seem to be improving and global markets stabilizing, it is still way too early to even talk about possible reversal or withdrawal of accommodation,” Chadha said. “It is important that the monetary policy continues to be accommodative and it does not contract at the first few signs of recovery.” “While it’s not an immediate necessity—RBI may keep powder dry for future—I believe there is room for a 50 basis point cut in the reverse repo rate,” he added.

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