Special Correspondent

Funds flow will force RBI to intervene

Stable interest rate regime likely

Inflation rate pegged at 4.4 p.c.

NEW DELHI: Global investment banker Lehman Brothers expects the Reserve Bank of India (RBI) to announce a hike in the cash reserve ratio (CRR) by 25 basis points as an immediate term measure to keep a check on the inflation rate as also curb the runaway appreciation of the rupee owing to the massive inflow of foreign funds.

“We expect [the] CRR to go up by 25 basis points in the immediate future and by December this year, [the] CRR may go up by 50 basis points,” Lehman Brothers Chief Economist Asia Robert Subbaraman told newspersons here on Wednesday.

Mr. Subbaraman felt that as the Indian economy was growing at a robust pace, the unabated inflow of foreign funds would continue and this, in turn, would force the RBI to intervene with its sterilisation tools. The most common intervention tool was the increase in the CRR as it was a measure of the quantum of the deposit funds that commercial banks were mandated to park with the central bank so as to squeeze liquidity.

On July 31, it may be recalled that the RBI had increased the CRR by 50 basis points to seven per cent so as to suck out nearly Rs. 16,000 crore from the money in circulation. Mr. Subbaraman noted that the CRR might even be raised by 100 basis points during the next year for the very same reasons.

In fact, the stage was set for yet another round of hike in the CRR in the immediate term as the excess liquidity owing to the massive inflow of funds was leading to an unprecedented rise in the value of the rupee against the U.S. dollar.

On interest rates, Mr. Subbaraman noted that the rate structure was likely to remain stable for some more time, provided the inflation rate remained under check. “We do not see interest rate going up, if the inflation rate remains under control,” he said. However, a cut in interest rates from the current level over the next five years was a possibility, he said.

As per estimates by the global investment banker, while the inflation rate is likely to be at 4.4 per cent this fiscal — much below the RBI’s projection of 4.5-5 per cent — a further appreciation of the rupee against the U.S. dollar could be ruled out in the long run.

With the Indian economy moving into a solid growth era, Lehman Brothers, in its report titled ‘India: Everything to play for’ said that improved productivity along with economic and financial reforms and urbanisation should support the rising trend of the rupee in the long-term. The rupee, the report said, still has much to gain from the uptrend in investment and productivity growth as strong demographic and urbanisation trends are in India’s favour.