The Reserve Bank of India (RBI) will not be changing the interest rates
in its upcoming policy in the light of moderating inflation and adverse
impact of global turmoil on liquidity, a Citigroup report said. In an
effort to ease inject liquidity in the system, it said, RBI indirectly
reduced the statutory liquidity ratio (the amount banks must invest
in government bonds) to permit greater access to liquidity under the
liquidity adjustment facility (LAF) as well as conducting LAF twice
daily starting from September 16. In addition, RBI also raised the interest
rate cap on non-resident Indian deposits to attract capital flows. The
government had hiked the overseas borrowing cap for infrastructure companies
from USD 100 million to USD 500 million for rupee expenditure.
"With headline inflation moderating coupled with the global turmoil,
the odds of the RBI keeping rates on hold are also rising," the
report said. RBI could ease monetary policy by mid-2009 when inflation
moderates to the 8 per cent level, it said. While the US liquidity shocks
didn't help, the tight funding conditions have more to do with India-specific
factors, brought about initially by RBI tightening moves to fight soaring
inflation, it said. Domestic liquidity conditions, which have remained
in the deficit mode since the last few months, took a turn for the worse
due to currency intervention to stem rupee weakness caused by capital
outflows and also outflows on account of advance tax payments and bond
auctions, it added. But funding conditions should improve with the new
RBI liquidity measures and as the government steps up the disbursement
of funds parked with the central bank.
