The Hindu Business Line : Nuanced change

The Reserve Bank of India has kept benchmark rates unchanged at 6 per cent for reverse repo and 7.75 per cent for the repo. Market views were deeply divided with about half expecting a repo rate cut. The RBI has explicitly recognised risks from global developments, and that monetary policy has become more complex.

This signals a nuanced change in stance, from a hawkish concern about inflation only to giving some weight to the risks to growth. This reinforces our view that interest rates have peaked and we expect the RBI to cut rates during the next policy meeting in April.

Deposit rates

Banks will gradually start lowering deposit rates taking the cue from the RBI’s policy statement. The RBI also expressed concerns about the size of capital inflows, and a preference for more stable components. It, however, gave no indication of how this could be achieved.

As for liquidity management, the RBI kept all options open, including a possible CRR hike. The macro environment is becoming more challenging — growth is moderating as indicated by weaker industrial production numbers and coincident indicators.

Growth to slow down

We expect FY09 growth to slow to 7.8 per cent from 8.7 per cent in FY08. In addition, there are risks to inflation from high oil and commodity prices. We expect inflation to climb from current levels of 3.8 per cent to around 4.5 per cent by end-March, which would still keep it within the RBI’s preferred ceiling.

The RBI has reiterated its endeavour to keep inflation close to 5 per cent in FY08. Rupee appreciation pressures are expected to continue. Rate differentials vis-À-vis the US are likely to increase given our view on the Fed cutting rates by 50 bp at its next meeting. Our 12-month USD/INR target is 37.6.

(The author is Vice-President, Asia Economic Research, Goldman Sachs.)

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