RBI may not hike interest rates in July review

Bank of America expects Reserve Bank to further step up liquidity restraint through accelerated government borrowings to avoid another rate hike during July monetary policy review.

However, further rate (repo and reverse repo) hikes by RBI is expected this year which will be rupee supportive and USD/INR may reach 43.5 by year end, Bank of America said in its latest forex strategy report.

The increase in borrowing amount to Rs 9,000 crore (Rs 90 billion) from Rs 5,000 crore (Rs 50 billion) earlier set for June 22 bond auction, reflects "the authorities intention to absorb liquidity via accelerated government borrowings" to avoid the need for RBI to alter existing monetary measures in near term, it said.

"Absorption of liquidity by the government as well as a 25 basis point hike in rates on June 8 will likely set stage for RBI to delay another rate hike until after the July 25 policy revirw," the report said.

However, prevailing economic conditions continue to augur further rate hikes this year, Bank of America said pegging dollar/rupee at 43.5 by end-2006.

Excess liquidity conditions persist despite June 8 rate hike, so the bank expects the RBI to continue stepping up on liquidity restraint after higher-than-expected government issuances this week.

This would require no major changes to existing monetary policy measures and can be implemented with relatively small incremental cost in the form of marginal higher yields, which also serves to dampen inflationary pressure. However, the foreign bank cautioned that the June 5 fuel price increase is likely to create inflationary pressure in the coming days.

Do you want to discuss stock tips? Do you know a hot one? Join the Stock Market Investments Discussion Group