RBI may keep interest rates unchanged

By SiliconIndia   |   Monday, 28 January 2008, 08:00 Hrs
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Mumbai: India's central Bank, Reserve Bank of India (RBI) may keep interest rates unaltered in the monetary policy to be announced on Tuesday, reported Business Standard.

The primary concern of RBI will be inflation and high money supply for at least a couple of months, sources close to RBI told Business Standard. This means that RBI will wait at least till the next policy review in April before adopting a softer stance on rates.

There was an internal view within RBI that the time is perhaps matured for a 25 basis point cut in the repo (repurchase agreement) rate. The corridor between the repo and reverse repo has been quite high at 175 basis points as against the conventional 100 basis points.

According to the sources the cash reserve ratio (CRR) may be increased 25 basis points to control liquidity following the rising interest rate differential between the U.S. and India after the 75 basis point cut in the U.S. Federal Reserve rate.

The growth of Indian economy may not be as high as last year; and the foreign exchange market inflows will be more evenly distributed across all Asian countries. RBI has all the instruments at its disposal to step in if the liquidity management becomes a problem.

There is in fact a liquidity surplus in the system with no substantial increase in credit pick-up and money supply is already ruling much higher at 21-22 percent above RBI’s forecast of 17-17.5 percent.

Currently, CRR is maintained at 7.5 percent after six tranches of hikes since April 2007.

One basis point is one hundredth of a percentage point while CRR is cash reserve ratio, which is portion of the deposits mobilised in a fortnight to be kept with RBI as a statutory requirement. Repo is the rate at which RBI infuses liquidity through purchase of government securities while reverse repo is the process of absorption of liquidity from the system through sale of government papers.

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