BRINGING RELIEF

Mumbai, July 29: Borrowers can heave a sigh of relief when Yaga Venugopal Reddy, the governor of the Reserve Bank of India, unveils the first-quarter review of the annual policy for 2007-08 on Tuesday. Reddy is unlikely to alter key instruments that could directly impact interest rates. This is because of a lower inflation rate than the target level of 5 per cent and a soft credit growth.

Recent data shows the inflation rate at 4.41 per cent, while the growth in credit is less than 25 per cent.

The RBI is not expected to raise the reverse repo rate — the instrument through which it absorbs excess liquidity from banks.

Opinions, however, are divided on whether the central bank will hike the cash reserve ratio (CRR) to drain the surplus cash in the system.

CRR is that portion of bank deposits that must be maintained with the RBI. It was last hiked by 50 basis points in March. The move sucked out Rs 15,500 crore.

Some bankers feel that the RBI could raise the CRR by another 50 basis points to 7 per cent to absorb the excess cash in the system. But others don’t expect so.

Manika Premsingh, economist at Edelweiss, feels Reddy will not alter any key rates because of softening credit growth and inflation remaining below 5 per cent. According to Premsingh, CRR will be left untouched.

“A CRR hike will be necessary if credit growth was sustained at elevated levels. Given the recent sharp fall in credit growth, a CRR hike does not seem necessary at this point of time,” she told The Telegraph.

However, HDFC Bank feels otherwise. In a recent note, the private sector bank said large and persistent liquidity created conditions for an inflationary uptick.

Moreover, it can also boost credit growth sharply and “breed exactly the kind of overheating that the RBI has tried to tame in the past”. HDFC Bank said such conditions could warrant the case for a liquidity reduction in the form of a 50-basis-point hike in the CRR.

While the answers will be known only on Tuesday, senior bankers will pay a lot of attention to what Reddy has to say in his policy document.

It is largely felt that a less hawkish stance, coupled with no rate actions, could immediately lead to a softening of interest rates.

“Deposit rates will be the first to be affected as they are at high levels. Lending rates will follow,” a senior official from a PSU bank said.

Though leading bankers say interest rates have peaked and they have to come down, some experts feel that the RBI may continue with its monetary tightening measures.

“For the time being, there could be a pause. But that does not mean that the monetary tightening is over,” said Rupa Rege Nitsure, chief economist at the Bank of Baroda.

According to Nitsure, firm crude oil prices and high money supply growth can have a bearing on inflation, thereby leading to a further hike in rates. Some analysts are also not ruling out the possibility of credit growth picking up.

In April, the RBI said given the monetary overhang of 2005-07, it was important to contain money supply growth in 2007-08 at around 17.0-17.5 per cent in consonance with the outlook on growth and inflation. However, recent data show that money supply is growing at 22 per cent.