RBI may take steps to curb asset price inflation - DBS

MUMBAI (Reuters) - The Reserve Bank of India's concerns on asset price inflation could lead to measures to control capital inflow, especially debt capital flows such as external commercial borrowing, DBS said in a note on Wednesday.

"Some of these policy changes may be reversed and presented as action taken to preserve financial stability," economist Ramya Suryanarayanan wrote.

The limits on these borrowings were significantly liberalised in the past year in view of the tight liquidity conditions that prevailed in the aftermath of the collapse of Lehman Brothers, it explained.

However, DBS said it doesn't expect the reversal of these policies until the next policy meeting in January.

Earlier this year India eased foreign borrowing rules for firms in the infrastructure and real estate sectors, and raised the foreign investment limit in corporate bonds to $15 billion.

The Reserve Bank of India laid the groundwork on Tuesday for a rise in interest rates by tightening credit to the commercial property sector, lifting its inflation forecast and warning of the threat of asset price bubbles.

DBS said it retains its expectations for the RBI to raise rates and cash reserve ratio (CRR) starting January and sees a 150 basis points interest rate hike in Jan-Jun 2010.

It expects the Reserve Bank to start with a 25 basis point hike in repo, reverse repo rates and CRR at its January policy meet. It sees a CRR hike of at least 100-150 basis points in Jan-Dec 2010.

(Reporting by Neha D'silva; Editing by Sunil Nair)