RBI likely to keep rates stable this quarter

The Reserve Bank is likely to keep interest rates stable in its monetary policy review later this month in view of the impending domestic oil price hike, and a possible US Federal Reserve rate cut which can lead to larger capital inflows into India, bankers and economists said.

"RBI is likely to signal a stable interest rate regime for this quarter. We feel the RBI might maintain both the repo and reverse repo rates at the same level," Indian Banks' Association's Chief Executive, H N Sinor, told PTI here.

In its last monetary policy review for 2007-08 this month-end, the apex bank is likely to continue with its tight monetary policy initiated in mid-2006 with inflationary and excess liquidity pressures persisting.

A possible recession in the US would also be factored in by the RBI, as a widely-expected Fed rate cut could lead to large capital inflows into India, putting pressure on the appreciating rupee and liquidity management.

"Money supply is expanding rapidly and a US Fed cut will attract more inflows," Bank of Baroda's chief economist Rupa Rege Nitsure said. The Fed may cut rates by 0.50%, she said, with some people even expecting a 0.75%.

"The interest rate differential between India and the US, presently at 3.50% could widen to 4% then, leading to greater inflows into the country, putting liquidity management under pressure," she said.