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RBI not to change interest rates
Monday, September 29, 2008

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.

 

 

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