Rates may stay unchanged

RUN-UP TO THE CREDIT POLICY

Sources close to the development said the stance could only change if the Wholesale Price Index-based inflation is way above the 7 per cent mark when data are released tomorrow.

In such a situation, the central bank may have to raise the reverse repo rate by 25 basis points in order to signal an upward trend in short-term rates.

But it is likely to leave the repo rate unchanged since it affects long-term interest rates and may jeopardise future growth.

The move may serve the purpose of tightening liquidity in the short run. Reverse repo is the rate at which RBI absorbs surplus funds from the system, while repo is the rate at which it infuses liquidity back into the system.

At a time when inflation is ruling over 7 per cent, subdued growth poses a major challenge for policymakers.

Sources also added that there was an internal debate to raise the cash reserve ratio (CRR) by another 25-50 basis points since the original idea was to hike it by 100 basis points and not by only 50 basis points as was done on April 17.

The central bank would, however, like to first assess the impact of the fiscal .0and monetary measures to bring down inflation over a month's time.

RBI is likely to fix the inflation target at 5-5.5 per cent, while lowering the growth forecast for 2008-09 to around 8 per cent with a downward bias from 8.5 per cent in the previous policy.

The downward bias reflects the downturn in agriculture, which has recorded low levels of growth and seen a fall in its contribution to the gross domestic product (GDP).

In any case, the industrial output is expected to see lower growth due to higher interest rates and a drop in export growth. The downturn in the global economic output may not augur well for growth in the financial services sector in India too.