RBI unlikely to tighten Post CRR hike further: Lehman

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Mumbai, Apr 23 (UNI) Investment Banker Lehman Brothers today expected the Reserve Bank of India to keep the repo rate, the reverse repo rate and the cash reserve ratio unchanged, at its monetary policy meeting here on April 29 In a paper circulated today, though RBI was likely to maintain a hawkish stance in view of the soaring inflation rates, it was unlikely to tighten the policy further in view of deteriorating growth outlook.

The Captains of Industry at a meeting of the Federation of Indian chambers of commerce and Industry also expressed vehemently against any change as it would impact further the growth sentiments of the industry.

Lehman brothers expect the RBI to set 8-8.5 per cent y-o-y as the GDP growth target for FY09 and maintain its WPI inflation target at close to 5 per cent.

It said, ''The interplay between slowing growth and rising inflation has increased the dilemma for monetary policy. On the one hand, industrial output growth has slowed to 8.7 per cent in FY08 (April-February) from 11.2 per cent in the same period last year.

Also, non-food credit growth, at 22.3 percent y-o-y in March, was already below the RBI's FY08 target of 24-25 percent.

On the other hand, India's wholesale price index (WPI) inflation has surged sharply from 4.3 per cent y-o-y in January to 7.1 per cent for the week of April 5, mainly due to higher food, fuel and metal prices, all largely supply-side driven by rising global commodity prices.'' On April 17 the RBI announced that the cash reserve ratio (CRR) will be hiked by a total of 50bp to 8.00 per cent in two stages (25bp on April 26 and again on May 10).

With this staggered CRR hike already in place, Lehman doubted that the RBI will follow up with another CRR hike on April 29. ''We have no doubt that the RBI will maintain a hawkish stance, but we do not expect hikes in the repo or reverse repo interest rates either, as this would amount to overkill on an economy that is already weakening and facing growing headwinds from financial market turbulence, slacking foreign demand, and high cost-push inflation'' it said.

RBI was likely to take a wait-and-see approach, especially as rate hikes were not very effective in lowering cost-push inflation, and the government had recently introduced a slew of fiscal and trade measures aimed at containing such inflation.


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