RBI may not signal interest rate hike: Moody's

The Reserve Bank of India (RBI) is likely to squeeze supply of money in the system by asking banks to keep more amount with them, but will refrain from signalling a hike in interest rates, says Moody's.

"The RBI is expected to opt for only a 50-basis point hike in the cash reserve ratio (CRR) at its January monetary policy review, while refraining from increasing the repo and reverse repo rates," Moody's Economy.Com, research arm of Moody's said in a statement.

The RBI is slated to come out with its third quarter monetary policy on January 29 amid expectations that the apex bank may tighten its monetary policy as wholesale price inflation crossed 7 per cent-mark in December.

Moody's said increasing the CRR would have a smaller impact on interest rates while helping to drain excess liquidity from the banking system that could potentially feed asset price bubbles.

However, raising the repo (short-term lending) and reverse repo (short-term borrowing) rates have a more direct impact on banks' interest rates.

The rate hike would have unwelcome consequences at this stage of the recovery. "Higher bank interest rates would discourage lending and boost saving," Moody's said.

It also said the biggest argument against monetary tightening is sluggish investment. India needs rapid investment growth to alleviate the infrastructure bottlenecks that constrain GDP growth.