POLICY WATCH CRR and repo rates raised many times recently. Further hikes will hurt growth Rate rise unnecessary as RBI has checked credit growth at current rates The CRR hike, announced earlier, of April 28 will suck out liquidity Capital control likely to check rupee appreciation ECBs a possible target for Reserve Bank

Mumbai, April 22: Bankers are not expecting Reserve Bank governor Yaga Venugopal Reddy to spring any more surprises on them. The consensus seems to be that there will be no interest rate hikes when the central bank announces its annual monetary policy on April 24.

Just last month, the Reserve Bank had jolted the banks with a 50-basis-point increase in the cash reserve ratio — a measure that determines how much money each bank must park with the RBI — and a 25-basis-point rise in the repo, a key short-term interest rate. One basis point is one-hundredth of a percentage point.

Banks have already started winching up their interest rates after the twin measures were announced. Another rate rise will hurt corporate and retail borrowers and spark fears of a slowdown in the economy, which grew 9.2 per cent in the year ended March 31.

There are several reasons why analysts and bankers don’t expect the RBI to raise short-term lending rates in this policy. Since June last year, the central bank has raised the repo rate (the rate at which it provides liquidity to banks) by 125 basis points. Similarly, the CRR has been raised thrice since December.

“After such increases, the central bank will not raise rates this time. It will hold them steady as another hike could hurt growth,” said a dealer with a private sector bank.

The other reason is that the Reserve Bank has succeeded in moderating credit growth, which, at one stage, had crossed 30 per cent. It has been trying to dissuade banks from lending excessive sums to the real estate sector with serious concerns expressed in some quarters about the emergence of an “asset bubble” — an evocative expression that the RBI itself hasn’t used till date.

Manika Premsingh, economist at Edelweiss Securities, said the central bank was not expected to raise rates this time around as its monetary tightening measures had paid off with credit growth moderating to the desired levels.

Last month’s CRR hike was to come into effect in two stages: the second phase beginning on April 28. This is being cited as another reason why the repo and CRR will not be touched.

Bankers, however, expect Reddy to take some capital control measures to stem the rising tide of dollar inflows, which has seen the rupee harden in recent months. The country’s foreign exchange reserves have already crossed $200 billion and the central bank could batten the hatch on external commercial borrowings (ECBs) — a window that corporates prefer to use to raise cash to fund ongoing projects.

“He is unlikely to control inflows from foreign institutional investors, but could target ECBs,” said a banker.

Strong dollar inflow arising from corporate borrowings is being cited as one of the reasons behind the rupee appreciation.

The RBI has preferred not to intervene in the forex market by scooping up dollars and, thereby, preventing it from hardening. One reason why it has chosen not to intervene is that the resultant infusion of rupees into the financial system could stoke inflation.

Inflation is currently ruling at 6.09 per cent — higher than the bank’s preferred level of 5 to 5.5 per cent.

Bankers expect Reddy to iterate the central bank’s determination to bring inflation within that range.

Observers are looking forward to Reddy’s enunciation of the new inflation forecast for 2007-2008. Many expect him to peg it at last year’s level of 5 to 5.5 per cent.