Expert Views & Market Reaction - RBI holds rates, tightens liquidity

Tue, 27 Oct 2009 06:38:22 GMT

 MUMBAI – The Reserve Bank of India (RBI) on Tuesday began the first phase of its exit from expansionary policy by ending some liquidity support measures taken when the global crisis hit Asia's third-largest economy harder than expected, but left key policy rates unchanged.

Effective immediately, it ended a special repurchase facility for banks and another for the funding needs of non-bank financial companies, mutual funds and housing finance companies.

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KEY POINTS:

-Begins exit from easy monetary policy by ending some liquidity support measures

-Raises WPI inflation forecast to 6.5 pct with upside bias, from 5 pct, at end-March 2010

-Holds repo rate steady at 4.75 pct

-Holds reverse repo rate steady at 3.25 pct

-Holds cash reserve ratio steady at 5.00 pct -Keeps 2009/10 GDP forecast at 6 pct with upside bias

-To lift statutory liquidity ratio to 25 pct from Nov 7

COMMENTARY:

ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, DELHI: "It is an extremely sensible move. There isn't an appetite from the private sector for credit, but there is a government appetite to fund counter-cyclical policies."

"The increase in the SLR would help allocate more funds for government spending. Going forward, we will have a reasonably high fiscal deficit, but the rise in SLR would help the government borrow more without widening this deficit."

"We are expecting hikes in interest rates in January due to high inflation and if the economy continues to pick up and supply-side shocks getting embedded into growth."

RAMYA SURYANARAYANAN, ECONOMIST, DBS SINGAPORE:

"This could be one way for them to signal rate hikes are imminent. It is tightening of course.

"Its not just the reversal of the cut that came in November 2008 but a broader sign that there is a lot of excess liquidity, inflation is rising and the central bank had to do something without hitting the government borrowing programme."

"Hiking SLR is one small step that could signal tightening without leading to any disruption in liquidity right now because banks already hold it in excess of that."

"I think the central bank, in terms of cues, has probably already set its mind on hiking rates because inflation forecast has been revised upwards that put together with a SLR hike means that the central bank is already looking at rate hikes."

"It wouldn't want to frame it in an extremely hawkish way because they wouldn't want to destabilise any market."

MARKET REACTION at 11:40 a.m.:

- 10-year benchmark bond yield was at 7.29 percent, from 7.25 percent immediately after the rate decision,

and 7.35 percent before the decision. On Monday it closed at 7.41 percent.

- The partially convertible rupee was at 46.79/80, from 46.77/78 per dollar after the policy, 46.84/85 ahead of the policy review, and from previous close of 46.645/655.

-The main share index down 0.65 percent at 16,631.81 points, after trimming losses to 0.3 percent after the policy.

LINKS: Reserve Bank of India Web site : www.rbi.org.in

BACKGROUND:

- Balancing the trade-off between supporting growth and keeping a lid on inflation poses a complex policy challenge, India's central bank said on Monday.

- The prime minister's economic advisory panel forecast inflation at 6 percent and GDP growth of 6.5 percent for the fiscal year that ends in March 2010.

- Top government officials have said several times in recent weeks there is no need for a change in monetary policy as that could hamper recovery of growth momentum in an economy hit hard by the global slowdown.

- India's industrial output expanded at its fastest pace in 22 months at 10.4 percent in August, signalling that rising consumer demand could fan inflation in the months ahead.

- Annual consumer price inflation was at 11.72 percent in August, driven by high food prices.

- The head of the central bank has said while India needed to exit from its easy policy stance, moving too early could damage growth and a delayed exit could fuel inflation.

- The RBI left key policy rates unchanged at a review in July after cutting the short-term lending rate by 425 basis points between October and April.

(Reporting by India Treasury Team; Editing by Jarshad Kakkrakandy)




(Reuters)

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