Weekly Snippets - Y.V. Reddy springs another surprise

Y.V. Reddy, the Governor of the Reserve Bank of India (RBI) yet again surprised the markets. While the market has been expecting a small hike in repo rate and reverse repo rate, Reddy left both of them unchanged, but hiked the CRR by another 25 basis points (bps). The CRR hike was in addition to the 50 bps increase announced a few days back and will take it to 8.25%, with effect from May 24. While the previous hike was expected to absorb excess cash worth Rs180bn, the latest one is likely to suck out Rs90bn from the system. The repo rate stands at 7.75% and the reverse repo rate at 6%.

Despite high interest rates, rising inflation and global concerns, the GDP growth rate for the year 2008-09 has been estimated at 8-8.5%. The RBI said it aims to bring inflation down to around 5.5% in the year 2008-09 and would prefer to bring it close to 5% as soon as possible. Going forward, the central bank wants inflation to be in the range of 4-4.5% and maintains medium-term inflation target of around 3%. The RBI said it is targeting a credit growth of 20% and deposit growth of 17% in FY09. The rate of growth in money supply (M3) is placed in the range of 16.5-17% in 2008-09.

The RBI mentioned that it gives high priority to price stability and well-anchored inflation expectations. The central bank also indicated that it stands ready to use both conventional and unconventional measures to reign in inflation expectations. So, the tightening bias will continue in the near term till inflation cools off below 6%. The central bank is likely to use CRR more and more to control liquidity. Lending rates, barring on housing loans up to Rs30 lakh, are not likely to rise from these levels. But, deposit rates may fall as banks try to control costs as margins will be under pressure amid slow credit growth and rising costs.

"Banks are quite happy that only CRR has been hiked and policy rates have been untouched," Chidambaram said after meeting the chief executives of public sector banks in New Delhi. "In the reasonable future, I don't expect any increase in interest rates by the public sector banks." ICICI Bank's CEO K.V. Kamath said interest rates will remain stable in the short term. Banks would still have sufficient cash after the measures to suck out funds, said Kamath. "Given the liquidity situation, interest rates will not rise," Kamath said. "The liquidity situation may change but at this point of time, I don't think interest rates will increase."