The Hindu Business Line : RBI unlikely to change rates

THE RBI Governor, Dr Y.V. Reddy, may leave key interest rates unchanged in his Annual Statement of Policy for 2004-05 to be announced on May 18. This is the consensus emerging among bankers and financial market players even as the statement may well be printed and finalised before the new Finance Minister takes office.

With the global scenario looking towards higher economic growth and a hike in interest rates and with domestic inflation looking up, RBI is likely to adopt a wait and watch policy, say bankers.

However, a small section of the market is expecting a snip in the short-term repo rate or the interest rate that RBI pays to banks for overnight parking of funds with the regulator.

"A 0.25-percentage point cut in the repo rate will help make the now flat yield curve of the government securities market a little steeper. The interest rate difference on overnight money and 10-year money is less than one per cent in India while it is about 3.76 per cent in the US," said Mr Vivek Royzada, Forex Analyst, Mecklai Financial.

A repo rate cut will make deployment in the repo window less attractive for banks thereby urging them to lend more of their fundsIt will also help reduce the interest burden that the apex bank has to service on the Rs 80,000 crore - Rs 90,000 crore worth of excess funds currently parked in the repo window.

The repo rate was last cut from 5 per cent to the present level of 4.5 per cent in August 2003.

According to the head of a European bond house, "RBI will state a neutral stance with bank rate and repo rate untouched. It is too early to raise interest rates and not possible to cut them since inflation is looking up in India. Globally the interest rate scenario is changing as the US Fed Reserve has indicated a rise in subsequent months and Bank of England has raised it recently. All Asian central banks are also now talking of an interest rate hike."

Concurs Mr Sanjeev Singh, Vice-President, Research, I-Sec, "... with economic growth outlook good and inflation expected to go up there is no case for a softer interest rate stance. The decision on interest rate has to be taken in the perspective of growth, inflation and domestic currency expectations and not just on the need to make the yield curve less flat."

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