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RBI – Mid-quarter policy preview
The RBI will be holding a mid-quarter review of the monetary and credit policy today. We
expect the RBI to keep the repo and reverse repo rates unchanged on account of easing
of headline inflation along the expected lines and hardening of interest rates due to
persistent tight liquidity situation. In the previous policy review, the RBI had hiked both
repo and reverse repo rates by 25bp each, keeping inflation in mind, but had guided for
a pause in the immediate future.
In the forthcoming policy review, it is likely to focus on liquidity conditions that have
remained intensely tight since the last policy review (average borrowing from LAF of
~`1,01,000cr since the last policy review). The tight liquidity conditions have led to a
significant increase in short-term interest rates (one-year G-Sec yields have moved up
from 6.8% as of November 2 to 7.45% as of December 14); this, in turn, is putting
upward pressure on bank lending and deposit rates. Most of the banks have hiked their
deposit rates across maturities by 50–150bp and a few banks have also hiked their base
and PLR rates in the past one month. Advance tax outflows in mid-December are likely to
worsen the liquidity situation. Also, inflation, the major reason for the recent monetary
tightening, has dropped (partly on account of the base effect) to an 11-month low of
7.48% in November 2010. Taking these factors into account, we expect the RBI to keep
the repo and reverse repo rates unchanged at 6.25% and 5.25%, respectively.
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