i Develop Stocks Advisory

RBI may keep interest rates unchanged Reserve Bank of India may keep interest rates unchanged in the monetary policy to be announced on Tuesday. Inflation concerns and high money supply will remain the primary concern of the central bank, sources close to the development said. According to the sources, inflation concerns and high money supply will remain the primary concern of RBI for at least a couple of months more. This means the central bank will wait at least till the next policy review in April before adopting a softer stance on rates. However, they added that the cash reserve ratio (CRR) may be increased 25 basis points to curb liquidity following the rising interest rate differential between the US and India after the 75 basis point cut in the US Federal Reserve rate. Sources close to the development said there was an internal view within RBI that the time is perhaps ripe for a 25 basis point cut in the repo rate, since the corridor between the repo and reverse repo has been quite high at 175 basis points as against the conventional 100 basis points. This can be accompanied by a 25 basis point hike in CRR. This, a section within RBI felt, will help tighten liquidity without the cost of issuing market stabilisation bonds and treasury bills. At the same time it would signal a softer stance on interest rate. With the cut in the US Federal Reserve rate and expectations of another 25-50 basis point reduction in the January 30 Open market committee meeting, this section felt that a repo rate cut is necessary to stem the deluge of foreign exchange inflows due to the interest rate arbitrage. However, RBI is veering to the view that a status quo is necessary as inflation concerns still remain high. Besides, Indian economy growth may not be as high as last year; and the forex inflows will be more evenly distributed across all Asian countries. Moreover, if the liquidity management becomes a problem, RBI has all the instruments at its disposal to step in whenever necessary. 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 per cent above RBI’s forecast of 17-17.5 per cent. Currently, CRR is maintained at 7.5 per cent 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 . These are tools for open market operations.