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New Delhi , Nov. 10

THE tightening of monetary policy by the Bank of England (BoE) and the Reserve Bank of Australia (RBA) over the past week, and speculation about the US Federal Reserve following suit, are unlikely to have any major impact on interest rates here, according to the country's two leading credit agencies, Crisil and ICRA Ltd.

"There is a huge liquidity buffer in the system, which will prevent any upward pressure on interest rates here", Dr Subir Gokarn, Chief Economist, Crisil, told Business Line. While it is possible that higher interest rates in industrialised countries and signs of upturn in the US and Japan would divert portfolio funds and reduce foreign capital flows to the country — which is the main source of liquidity — "the existing liquidity buffer will be more than sufficient to sustain the present soft interest rate regime".

Dr Gokarn's estimates are that banks are now sitting on surplus cash of roughly Rs 2 lakh crore, which they have parked in debt instruments over and above their statutory liquidity ratio and cash reserve requirements. Moreover, "we expect wholesale inflation to average around 4.8 per cent during the current fiscal and end at 2.9 per cent".

This, in turn, would give enough room for that Reserve Bank of India to persist a monetary policy that would, at best, be "soft" and, at the worst, "neutral".

Mr Saumitra Chaudhuri, Economic Advisor, ICRA Ltd, on the other hand, felt that it was too early to even draw conclusions from BoE and RBA's move to raise their benchmark rates by 25 basis points last week, to 3.75 and 5 per cent, respectively.

"Britain, unlike most other advanced economies, has not been affected by slowdown and one should not read too much into the quarter percentage point rise in the repo rate announced by the BoE. What matters more is the course to adopted by the central banks in the European Union, US and Japan", he said.

According to Mr Chaudhuri, the European Central Bank was unlikely to increase interest rates in the near term, given that all its four major economies — Germany, France, Italy and the Netherlands - were passing through a severe downturn.

Moreover, with the euro holding strong, a hike in interest rates by the ECB would only lead to a further erosion of export competitiveness.

The same was true for Japan, which is just about showing nascent signs of recovery that could be derailed by any move to tighten monetary policy.

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