Reserve Bank of India Intends To Keep Rates Unchanged

The Reserve Bank of India (RBI) will keep its short-term lending rate unchanged at 9.0 percent at the next policy review on October 24 and may cut it in 2009, Macquarie Securities expect the RBI to begin easing monetary policy from April 2009 predicting a cut in rates for banks by 200 basis points.

Macquarie had earlier forecast a quarter percentage point increase in the repo rate to 9.25 percent, but said it had revised its forecast due to the global financial problems.

The RBI raised the repo rate three times in June and July, increasing it by 125 basis points to a seven-year high of 9 percent. It has also tightened banks’ reserve requirements this year to moderate double-digit inflation.

Annual inflation, based on wholesale prices, has eased after reaching 12.63 percent in early August, the highest since annual numbers in the current data series were available in April 1995.

The latest reading shows inflation at 12.14 percent in early September.

Rajeev Malik, Macquarie economist, said,

“The key reason for our revision is the backdrop of the ongoing global financial stress that will likely prompt the RBI (Reserve Bank of India) to maintain the status quo on rates.

“Governer D. Subbarao will probably signal a shift to neutral at the October policy review.

“An earlier easing in the January-March quarter cannot be ruled out, owing partly to the timing of the next general election and/or better-than-expected inflation data.

“(Inflation) is expected to be in the high single-digit by end-March 2009. Consequently, the RBI will opportunistically prefer to keep the policy unchanged for now rather than tighten it further to bring about a faster decline in the inflation rate.”

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