Lehman brothers: CRR hike not surprising

Mumbai, Apr 18 (UNI) Investment banker Lehman Brothers today said with the Credit Reserve Ratio increased by 50 basis points, the Reserve Bank of India might not tinker other policy rates at its meeting on April 29 due to slowing growth and the supply side nature of current inflation rise.

''We have been highlighting the risk of liquidity tightening measures by the RBI, so the CRR hike is not entirely surprising.

However, with the quarterly policy meeting due on the April 29, the timing suggests the urgency in the minds of the policy makers,'' Lehman Brothers stated in a release issue here.

It said CRR hike had twin objectives: liquidity management and anchoring inflationary expectations. Liquidity has been excess in the system, as witnessed by the surge in the net absorptions under the RBI's liquidity adjustment facility (LAF). Daily LAF absorptions increased to Rs 401 billion during the first fortnight of April as compared to average liquidity injections of Rs 274 billion during the last fortnight of March.

With money supply growth still robust, rising foreign exchange reserves and widening interest rate differentials vis-a-vis the US, the CRR hike should help drain some of the excess liquidity, with the rest likely to be absorbed through aggressive issuances of the market stabilisation scheme. Meanwhile, maintaining tight liquidity has become critical currently when the wholesale price index (WPI) inflation has already surged from 3.8 per cent y-o-y in early January 2008 to 7.1 per cent for the week ending April 5. The CRR hike is,therefore, also aimed at containing inflationary expectations.

It also said, ''With the CRR hike already in place, we do not expect another CRR hike to be announced in April. Further more, we maintain our view that the RBI would keep both the repo and reverse repo rates unchanged in the April policy. Much of the current inflation surge is supply side led and is a reflection of the surging prices of global food, fuel and metals, on which policy tightening does not have effect.'' The release further added, with industrial output growth already slowing and rising headwinds from weakening global outlook, financial market turbulence and tight monetary conditions domestically, a repo rate hike would amount to overkill in the economy. However, with inflation firmly above the RBI's comfort zone of five per cent, we do not expect any rate cuts either, and therefore expect GDP growth to slow to 7.6 per cent in FY 09 from 8.7 per cent in FY08.

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