INSTANT VIEW - RBI raises cash reserve ratio, holds rates

A cashier checks currency notes inside a bank in Agartala in this July 24, 2009 file photo.

MUMBAI (Reuters) – The Reserve Bank of India (RBI) on Friday raised the cash reserve ratio for banks by a higher-than-forecast 75 basis points but, as expected, left key interest rates unchanged.

The Reserve Bank of India raised its forecasts for inflation and economic growth.

KEY POINTS:

* Cash reserve ratio raised by 75 basis points in two stages to 5.75 percent. First phase of 50 bps effective Feb 13, second phase effective Feb 27

* Repo rate held steady at 4.75 percent, reverse repo steady at 3.25 percent

* Baseline projection for GDP growth in 2009/10 raised to 7.5 percent from its earlier projection of 6.0 percent.

* Baseline projection for WPI inflation for end March 2010 raised to 8.5 percent from earlier projection of 6.5 percent

* Forecasts had centred on rise of up to 50 bps in CRR and steady rates.

COMMENTARY:

A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP, MUMBAI:

"The way RBI has raised the CRR, I think by May repo rate could be operating rate. I think RBI wants to wait for the budget to decide on its rate hike move. They may wait to see to what extent the government unwinds the stimulus measures. They may also be waiting for the decision of fuel prices before raising rates."

DEEPALI BHARGAVA, ECONOMIST, ING VYSYA BANK, MUMBAI:

"An increased confidence in recovery has encouraged RBI to clearly and explicitly shift their stance from 'managing the crisis' to 'managing the recovery'. We see the RBI embarking on a series of rate hikes with this monetary policy, and carry forward the process of exit further."

"The quantum will likely not be aggressive as ensuring credit demand for productive sector continues to be on RBI's agenda. The next step will likely be a hike in repo and reverse repo rate."

"The timing will depend on how inflation pans out. An inter-meeting hike cannot be ruled out. We continue to expect cumulative hike of 100-125 basis in reverse repo and 2010 with 200 basis points in CRR."

RAHUL BAJORIA, REGIONAL ECONOMIST, BARCLAYS, SINGAPORE:

"The growth outlook upgrade wasn't really a surprise as we have been bullish on growth for the current fiscal for a very long time. On inflation front we are slightly a bit more concerned because we are looking at 9 percent inflation by end-March and now that RBI is looking at 8.5 pct.

And given the recent weekly releases we haven't seen food prices come down as much as it was embedded in our forecasts, so there are upside risks to inflation.

"RBI has staggered its CRR hike in two phases.., so the likelihood of more action on the CRR front until the next policy is quite unlikely in our opinion. On repo and reverse repo, our official call is still for 50 basis points before the end of March.

ADITI NAYAR, SENIOR ANALYST, ICRA, NEW DELHI:

"A higher-than-expected increase in the CRR reflects the RBI's proactive stance. It seems the RBI is concerned about inflation, as not only the food inflation but also the core inflation has begun to firm up."

"Despite this higher-than-expected hike in the CRR, there will be sufficient liquidity in the system."

"I don't think there will be any interim policy response from the RBI ahead of the April policy. It has revised upwards the WPI forecast for the current fiscal year and will wait to see whether the food inflation subsides following the winter crop."

BRIAN JACKSON, ECONOMIST, ROYAL BANK OF CANADA, HONG KONG:

"Although the RBI left policy rates unchanged, the tone of its rhetoric is fairly hawkish. The greater-than-expected increase in the cash reserve ratio highlights the RBI's concerns about managing inflationary expectations, with Governor Subbarao explicitly warning about the risk of higher food prices spilling over into broader price pressures."

"The increase in growth and inflation forecasts also suggests that policymakers are increasingly uncomfortable with keeping rates at current levels. The policy bias is now firmly in the direction of higher rates, and we continue to forecast rate hikes in the next few months."

TIM CONDON, HEAD OF ASIA RESEARCH AT ING, SINGAPORE:

"They want to withdraw excess liquidity from the system, but we don't think they really want to slow the economy."

"We expect inflation to peak in the middle of the year. We don't think there is a great inflationary problem. They want to keep inflation expectations anchored and try to withdraw liquidity, that's why we see the bigger-than-expected reserve hike."

"They have got a PBOC problem. They do have a hot money problem like China. Inflows have been very positive for quite some time."

"Our baseline forecast is that we will see a policy rate hike in April.

"We basically expect the dollar/rupee to get down to 43 by the end of the year. The rupee is going to be one of the best-performing currencies in Asia.

"Growth has been surprising on the upside, the government has reacted very quickly with monetary and fiscal stimulus and that has been very effective. We are looking for an acceleration to 8 percent growth in the next couple of years."

WOON KHIEN CHIA, STRATEGIST, ROYAL BANK OF SCOTLAND, SINGAPORE:

"It's a big step but not enough. They have a lot of excess liquidity and the quicker way to have a more lasting permanent effect on interest rates curve is to hike the reverse-repo rate.

"There should be some knee-jerk reaction and the market would position for an actual rate hike for the next move.

"We expect a 25 basis point rate rise in the first quarter and another 25 basis points in the second quarter, but the outlook needs to be reviewed again."

ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI:

"CRR hike of 75 basis points was more aggressive than what market was expecting. With growth projection revised upwards to 7.5 percent for FY10 and inflation also revised upwards to 8.5 percent by March end, clearly focus has shifted towards inflation management, which clearly indicates as far as policy rate hikes are concerned, we should see them sooner than later.

"We expect a 25 basis point hike in repo and reverse repo rate each on or before the annual April policy meeting."

DEVEN CHOKSEY, CHIEF EXECUTIVE OFFICER, K R CHOKSEY SHARES & SECURITIES, MUMBAI:

"The CRR rate hike is more than market expected, but I would not be too worried because the RBI is concerned about holding inflation, and it's good that they are not taking their eyes off reality. At the same time, they are keeping enough leverage in the system to take care of growth requirements of the economy.

I don't see any immediate interest rate hike, so sensitive sectors like auto and realty should not be under pressure, but one should remain cautious."

RAJEEV MALIK, ECONOMIST, MACQUARIE CAPITAL, SINGAPORE:

"The CRR is slightly bigger... but I think certainly in the context of a sizeable upgrade as far as the GDP growth expectation is concerned. Overall, still a very much handle-with-care exit."

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI FINANCIAL SERVICES, MUMBAI:

"Liquidity is traditionally tight in February and March, and with the government's divestment plans and this steeper-than-expected tightening, short-term liquidity will be significantly tighter."

"Banks do not earn any interest on the CRR and given the state of credit offtake, it will be very difficult for banks to pass on these costs to clients. So most of the heat from this tightening will be taken by banks."

"Inflation will get close to 9 percent by end-March and will soften from there. And unless WPI inflation touches double digits, I think the liquidity-mopping measures are done with for this fiscal year."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI: "There is some surprise in the extent of the hike in the cash reserve ratio, but rates remaining unchanged is in line with market expectations. The 75-basis-point hike in CRR is the first step in the tightening cycle."

"Going forward, we expect an inter-policy hike in the reverse repo and a hike in the repo rate in the April policy."

GAURAV KAPUR, SENIOR ECONOMIST, ABN AMRO BANK, MUMBAI:

"The policy announcement of a 75 basis points CRR hike is largely in line with expectations. The surprise element is in the upgrading of the real GDP forecast for FY10 to 7.5 percent from 6 percent.

That, along with an increase in the WPI inflation forecast to 8.5 percent for end March 2010, suggests that the RBI might not wait until the next monetary policy in April to raise policy rates. An inter-meeting rate hike looks imminent now."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:

"This is along expected lines, but slightly more aggressive than thought of. We had expected that they would do something to control to the liquidity overhang which has potential to fuel inflation in the coming months, but I still feel this may not be very effective in controlling inflationary expectations as supply shocks have been quite severe and the demand-pull pressures are still on the weaker side in the inflation process.

The next policy action would be at the annual policy, and that will be conditional upon the actual credit pick-up in the fourth quarter."

MARKET REACTION:

Benchmark 10-year bond yields rose 4 basis points and the rupee and stocks extended losses after the central bank raised banks' reserve requirements more than expected and held key rates steady at its policy review.

LINKS: The Reserve Bank of India (RBI) website click www.rbi.org.in

BACKGROUND:

- India's food price inflation accelerated first time in four weeks to 17.4 pct y/y in mid-Jan.

- India's wholesale price index (WPI) rose 7.3 pct in

December from a year earlier, its highest since Nov. 2008.

- India's industrial output grew at its fastest pace in two

years in November to 11.7 percent.

(Reporting by India Treasury Team; Editing by John Mair)