Goldman sees more monetary tightening

Global banking and investment giant Goldman Sachs has forecasted monetary tightening measures by the Reserve Bank of India...

Global banking and investment giant Goldman Sachs has forecasted monetary tightening measures by the Reserve Bank of India (RBI) in the coming days. “Given the huge political importance of inflation, the big gap between current inflation and RBI’s preferred ceiling, the existence of continued demand pressures, dangers of inflationary expectations increasing, and real policy rates driven to under 0.5 per cent, we expect the RBI will continue its tightening measures,” it said.

“In particular, we continue to expect a repo rate hike in its policy meeting on April 29. We think that the RBI will go for a 25 bps increase in repo rate. The guiding principle would be to arrest inflationary expectations and further slow demand. We expect the CRR hike will increase pressures on the rupee to appreciate as rupee liquidity will tighten. We continue to expect a 4 per cent appreciation of the Indian rupee vis-à-vis dollar in FY’09,” the central bank said.

As banks showed more affinity towards government securities in a volatile market scenario last fortnight, RBI charted out a plan to suck out excess liquidity from the system. As per market expectations, the RBI hiked the cash reserve ratio by 50 basis points on Thursday.

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The CRR hike announced by the central bank will be implemented in 2 stages on April 26 and May 10. The move will drain about Rs 18,500 crore of excess cash from the system. This increase will take the CRR from 7.5 per cent now to 7.75 per cent on April 26 and 8 per cent on May 10. Banks had deposited an average of Rs 27,900 crore per day in the reverse repo window in the last fortnight, says a Goldman Sachs report.

“We were expecting the RBI to tighten monetary policy, but would have preferred increases through the repo rate rather than through CRR, which is a blunt tool penalising the banking system. This move will impact the banks negatively, although it is in line with market expectations,” said the bank.

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