Policy rates seen steady ahead of July 27 review

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A majority of economists expect the Reserve Bank of India (RBI) to leave rates steady ahead of its quarterly review on July 27, a new Reuters poll showed on Friday, but almost all expect the RBI to raise rates in the policy review.

Of 20 economists polled, 15 said they expect no change in the RBI's main borrowing and lending rates ahead of the July 27 policy review, but 18 of those polled expect the RBI to raise both rates by up to 50 basis points.

In a survey soon after the RBI's annual policy on April 20, a narrow majority of economists had expected the RBI to raise rates again before the July review.

The RBI has raised the repo rate, at which it lends to banks, and the reverse repo rate, at which it absorbs excess cash from the banking system twice in March and April by 25 basis points.

The repo rate now stands at 5.25% and reverse repo is at 3.75%.

Twelve out of 19 economists polled after the April rate move had expected the RBI to raise the reverse repo rate, its short-term borrowing rate, by 25 basis points by end June.

The new poll showed that none of the 19 analysts see any change in the cash reserve ratio (CRR), the proportion of deposits banks must keep with the RBI. The CRR is at 6% now.

"The RBI will look at domestic conditions and balance growth with inflation. They are comfortable with growth now, but will see how demand-side inflation moves by the next policy review before deciding on rates," said Madan Sabnavis, chief economist at CARE Ratings in Mumbai.

Twelve economists expect the RBI to raise the repo and reverse repo rates by up to 100 basis points by end-December. Five out of 12 economists forecast a 50 basis point increase in the CRR by December.

Most analysts do not expect the RBI to slow down the pace of policy tightening due to the euro zone debt crisis and global uncertainties.

Thirteen out of 21 analysts polled do not expect the RBI to moderate its policy tightening pace but eight economists said the RBI might slow down.

Seventeen out of 21 economists polled said the RBI's policy tightening has been appropriate, while four said the RBI should raise rates more aggressively in the months ahead.

"We do not expect the pace of monetary tightening to slow if the crisis remains contained to southern Europe," said Sajjid Chinoy, an economist with JPMorgan in Mumbai.

"If, however the sovereign debt and financial crisis spreads to the entire euro area, it could slow down the pace of monetary tightening in India," he added.