CARE expects RBI to keep policy rates unchanged

Rating agency CARE expects the Reserve Bank of India (RBI) to maintain the policy rates at the current levels. It is also not expecting any changes in the cash reserve ratio (CRR) and statutory liquidity ratio (SLR).

"We expect the RBI to maintain policy rates at their current levels with this policy review, as the fundamentals of the economy remain strong. We do not expect any changes in the CRR and SLR," said CARE in a note released on Friday.

It, however, adds that market participants have factored in a 25 basis points (bps) raise, as is visible by higher (and rising) 10-year GSec yields.

"In the event, that the RBI does raise interest rates, it would be in the nature of a pure inflation-management tool. The RBI is bound to maintain a keen watch on inflation," it explains.

Further, bankers feel that any reduction in CRR or SLR by the central bank in this policy review may be viewed as an attempt to infuse liquidity into the banking system, as scope for lending by banks would increase.

The rating agency further notes that speculation on RBI resorting to the issuance of market stabilization scheme (MSS) bonds in the second half of this financial year has been increasing.

"The RBI would aim at absorbing the incoming dollars, whilst injecting domestic currency to ease liquidity. Moreover, traditionally the RBI is seen to cut its borrowing program (by cancelling auctions) towards the end of the financial year. This as well will ease liquidity pressures by the end of the year," it explains.