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The man who hiked key interest rates 13 consecutive times to rein in double-digit inflation before starting to cut them, is unlikely to tinker with the rates in the first quarter review of monetary policy to be announced on July 30.
Unless the Government gives him an extension, the policy review will be RBI Governor Duvvuri Subbarao’s last before he demits office in September.
Bankers and economists feel that Subbarao will likely leave the cash reserve ratio (CRR) and the repo rate unchanged on Tuesday.
CRR is the slice of deposits that banks keep with the RBI. And, repo is the rate at which banks borrow short-term funds from the central bank. CRR currently stands at 4 per cent and repo rate, 7.25 per cent.
The RBI uses these policy tools to contain inflation, manage liquidity and promote growth in the economy.
Concerned over the inflationary ramifications of a weaker rupee, the RBI, over the past ten days, initiated a series of moves to suck out excess liquidity from the banking system to bring some amount of stability to the rapidly depreciating Indian rupee.
“Excessive liquidity, in the hands of a few players, was being used for speculative forex trading,” said Madan Sabnavis, Chief Economist, Care Ratings.
Markets and economists have, with a thumping consensus, termed the RBI move as akin to raising short-term interest rates as also the CRR by about 50 basis points.
The RBI has restricted banks’ daily borrowings from it (under the repo window) at 0.5 per cent of their net demand and time liabilities, and mandated that banks maintain a minimum daily CRR balance of 99 per cent of the requirement.
Earlier, there were no restrictions on banks borrowing from it under the repo window and banks had to only maintain a minimum daily CRR balance of 70 per cent of their total requirement.
WILL RATES BE HIKED?
Given that the Wholesale Price Index-based inflation for June was 4.86 per cent, better than the RBI’s comfort level of 5 per cent, the central bank is unlikely to increase the rates, economists believe.
A rate increase at this point will be seen as reversal of RBI’s stance to address both growth and inflation concerns.
Growth in Asia’s third largest economy slowed to a decade low of 5 per cent in the last fiscal, and estimates have pegged growth to be in the 5.5-6 per cent range during the current financial year.
“The intent of the RBI is not to increase the long-term rates. Since WPI-based inflation is already under RBI’s comfort zone, the central bank will not want to give any indications that are perceived as inimical to growth of the economy,” said Sabnavis.
Economists have also brushed aside concerns of foreign investors withdrawing money from India and taking it to the US because of the rising yields there. They believe that interest rates in the US will only shoot up if the Federal Reserve actually withdraws the $85 billion per month stimulus.
They believe that the RBI has used various other policy measures at its disposal well to hike the short-term rates and there might be no real need to increase the policy rates.
LIKELY TO STAY CONSTANT
Since January 2012, the RBI has cut key rates by 125 basis points and CRR by 200 basis points, but still banks have not proportionately passed on the benefits to end-customers.
Though short-term interest rates have increased, banks are unlikely to effect a change immediately because the recent RBI measures are perceived as temporary.
Bankers, economists and market participants believe once sanity is restored to the currency markets, short-term interest rates will also come down.
“I am hopeful that the liquidity tightness will not persist for long,” said S. S. Mundra, Chairman and Managing Director, Bank of Baroda.
“As of now, the question of raising deposit or lending rate does not arise. We will closely watch the (liquidity and interest rate) movements,” said V. R. Iyer, Chairperson and Managing Director, Bank of India.
Banks had recently cut their base rate (to which the lending rates are linked) on the prodding of Finance Minister P. Chidambaram.
> satyanarayan.iyer@thehindu.co.in
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