Reserve Bank of India governor D Subbarao met finance minister Pranab Mukherjee here on Friday ahead of the release of its annual review of the monetary policy on Tuesday. The RBI is expected to raise policy rates and also to suck excess liquidity from the system, while it attempts to balance growth and inflation.
?I have come to review the macroeconomic situation with the finance minister as is customary. You will know our policy actions when we do the review on Tuesday, April 20,? said RBI governor D Subbarao after the meeting. Government officials and most analysts expect only a moderate hike in interest rates by RBI.
?I believe inflation is still high. We do need policies for that (containing it), but probably inflation has peaked,? Kaushik Basu, chief economic advisor in the ministry of finance said on Friday. ?It (inflation) is going to be on a downward trajectory slowly for 2-3 months and then rapidly thereafter,? he said.
Analysts expect the RBI to raise repo and reverse repo rate by anywhere between 25 basis points and 50 bps, in order to arrest inflation almost touching double-digits and to move towards a neutral monetary policy stance. Repo rate is the rate at which it lends to the banks, while reverse repo is the rate at which it borrows from them.
State Bank of India chairman OP Bhatt said on Friday ?there is an upward bias in interest rates? but the bank is unlikely to increase its rates much in the next 2-3 months. ?There is still a fair amount of liquidity in the system so possibly during the next 2-3 months despite the upward bias there may not be much hiking of interest rate,? Bhatt said while launching a special concessional banking scheme, Defence Salary Package, for the Air Force personnel in the Capital.
The RBI raised the cash reserve ratio (CRR) for banks by a more-than-expected 75 bps in January and followed it with a between-meeting surprise 25 bps point increase in the key repo and reverse repo rates in March. CRR is the slice of deposits banks need to keep with the RBI.
Economists are expecting a small hike in CRR too. ?The LAF (liquidity adjustment facility) is currently comfortable at around Rs 55,000 crore to Rs 60,000 crore and could warrant a 50 bps increase in the CRR,? said Kotak Mahindra Bank chief economist Indranil Pan. Bond have priced in an at least 25 basis point rate rise and an increase in CRR that could help drain liquidity. The UPA government is facing a special parliamentary vote on high prices in the ongoing budget session. If it loses the vote it has to resign, although there is little risk of it losing power anytime soon. No date has yet been set for the vote.
Government officials feel lower-than-forecast headline inflation for March?which at 9.9% was still its highest since October 2008?allows the central bank to limit the extent of tightening.
But there are worries that any rise in fuel prices to cut the government subsidy burden could put further upward pressure on prices. The central bank could also indicate its stance on the regulations concerning new banking licences that it plans to award following the announcement by finance minister Pranab Mukherjee in the budget.
According to a senior official, the new rules would be largely based on the existing policy which calls for a diversified ownership as a precondition to awarding a bank licence. RBI is unlikely to consider applications from industrial houses or large corporates.
?The objectives (for RBI) are clearly a balance between maintaining growth impulses, containing the current inflation impulses and anchoring inflation expectations and managing liquidity to facilitate the expected increase in bank credit and an orderly conduct of the government?s market borrowing programme,? said Axis Bank economist Saugata Bhattacharya.