RBI may try balancing act in monetary policy

Mumbai, Jan 27 | Updated: Jan 28 2008, 05:37am hrs
The Reserve Bank of India (RBI) may resort to a balancing act between curbing high liquidity and spurring growth in the monetary policy review on Tuesday, bankers feel.

Others say that the apex bank would maintain status quo on both the short-term rates as well as cash reserve ratio (CRR) and adopt a wait and watch stance. However, with the US Federal Reserve slashing its rates by 0.75% last week, some bankers feel that the RBI might consider a 0.25-0.50% cut in interest rates and a 0.25% reduction in the CRR margin.Following the Fed rate cut, the possibility of huge capital inflows into India has increased and the RBI might take steps to narrow the interest rate differential between the two countries, Indian Banks' Association's chief executive H N Sinor said.

The RBI may send out a signal by reducing either the reverse repo or the repo rate by 0.25-0.50% to moderate capital flows, Sinor said.

The repo and reverse repo rates currently stand at 7.75 % and 6% respectively. While a hike in key rates might temper capital inflows, a cut in CRR would release some capital, which could be used by banks for increasing credit offtake and thereby spurring growth, which has slowed down in some sectors including manufacturing, textiles and consumer durables. High interest rates have hit growth in certain sectors. Whether the RBI does it this month-end or a little later remains to be seen, private sector Yes Bank chief Rana Kapoor said.

Dena Bank chairman P L Gairola feels that one could expect a 0.25-0.50%cut in rates, accompanied by a 0.25% cut in CRR. The difference between the repo and reverse repo rates, presently 1.75%, could also be narrowed, he said.

Two leading public sector bankers, M V Nair of Union Bankand T S Narayanasami of Bank of India, however, think that the RBI is likely to maintain status quo in interest rates this time. Any change in interest rates is unlikely in the policy this time,Nair said. Global markets are still volatile and so is the domestic market. I feel a status quo will continue in the medium-term, Narayanasami said.