Date:01/11/2007 URL: http://www.thehindubusinessline.com/2007/11/01/stories/2007110151890900.htm

Back RBI seen paring reverse repo rate in due course

Mr Indranil Sen Gupta

Our Bureau

Chennai. Oct. 31 DSP Merrill Lynch expects the Reserve Bank of India to eventually pare the reverse repo rate as the US Fed eases. Mr Indranil Sen Gupta, Senior Director and Chief India Economist, – DSP Merrill Lynch, while agreeing with the RBI’s monetary policy outlook, said strong monetary expansion emanating from capital flows poses inflationary risks given rising asset and oil prices.

“To manage liquidity, we expect the RBI to shift to quantum instruments – CRR, MSS sterilisation bonds. Lending rates will likely top off after the current busy season. The RBI will likely cut SLR next year releasing resources for credit once flows abate reducing MSS issuances, he said.”

Mr Tushar Poddar

According to Mr Tushar Poddar, Vice-President, Goldman Sachs, the RBI has rightly judged the risks from financial conditions being too loose as greater than the threat of a growth slowdown. “We expect the RBI will continue to use all the weapons in its arsenal to deal with excessive liquidity, including MSS bonds, the reverse-repo window and CRR hikes”, he said.

The signal from the RBI is —policy likely to remain tight, rate cuts not yet on the horizon, he said. “There are upside risks to inflation. Our 12-month USD/INR target is 38. We expect the RBI will continue to actively manage liquidity through the MSS and reverse repo windows and the CRR. Money growth at 21.7% year on year in the fortnight ending October 12 remains well above the RBI’s indicative projection of 17%-17.5%,” he said.

Mr Ananda Bhoumik

Mr Ananda Bhoumik, Senior Director, Fitch Ratings, said the two key themes that continued to underline the monetary policy stance were the runaway growth in investment inflows and the overhang of inflationary expectations that persist in spite of benign domestic conditions in recent months. The immediate aftermath of the hike on banks will be a reduction in net interest margin on account of the increased appropriation. “The global turbulence in credit markets has not had any major effect on Indian banks, mainly due to lack of exposure to the affected segments. The policy has pointed out that any contagion effect from the crisis may not have been fully played out yet, though their effects on emerging markets may be muted compared to past crises ,” he said.