NEW DELHI: The Reserve Bank is likely to tighten money supply in its annual credit policy on April 29 to rein in inflation, but the move may not push interest rates up because of huge liquidity in the banking system.

With inflation over a year high of 6.68 per cent, there is widespread expectation of RBI increasing Cash Reserve Ratio (CRR), amount of mandatory deposits each bank has to keep with the central bank. There is a high probability of hike in CRR and further rupee appreciation in the near term, Standard Chartered said in a report.

But, deprecation is likely in the Indian currency to 42.50 per dollar level by September, it said. Risks of hikes in CRR have increased substantially, it said, adding that though growth has moderated in the recent months and tight money supply can slow it further, the hastened pace of increase in inflation in the backdrop of moderating growth raises concern about price stability.

"Hence the central bank can resort to a CRR hike (perhaps a 50 basis points hike from the current 7.5 per cent) as a last resort if inflation continues to fly," it said. Oriental Bank of Commerce Executive Director Allen C A Perriera said the situation is quite complex for the RBI. It is difficult to say what monetary initiative would come to sooth inflationary expectations.

However, interest rates seem to be stable in the short term, he said.  According to another senior banker, it would be a tough call for the RBI to raise interest rates in the backdrop of falling rates globally. Any upward rate revision would lead to inflow of capital by virtue of differential rates, he said.

Amidst lack of clarity on the stance, bankers feel it is better to adopt a wait and watch policy before clarity emerges on the monetary policy.

Case in point is IDBI's decision to defer the plan to cut its prime lending rates (PLRs). IDBI had deferred the cut in benchmark prime lending rates by 0.50 per cent to 12.75 per cent "keeping in mind the rise in inflation and Finance Minister's call to take all necessary steps to contain price rise".

"We have decided to defer the BPLR revision taking into account the market conditions and rising inflation. We would review the situation again in a period of two weeks," IDBI Chief Financial Officer R K Bansal said.

Bank of Maharashtra Chairman and Managing Director M D Mallya expressed a similar view, saying the state-run lender would wait and watch the market conditions and take a cue from the Central bank before reviewing the interest rates.

"The liquidity conditions are sufficient at this point of time. However, the soaring inflation is a concern (to the banking sector). We will take a cue from RBI before taking any step on rates," Mallya said. Private sector lender Development Credit Bank (DCB)'s Managing Director and CEO Gautam Vir also expected tight monetary steps from the Central bank in its policy and said lending rates are likely to stay flat in the next 2-3 months.

"RBI will definitely take major steps to tackle inflation. There is high pressure on the supply side that has contributed in fueling the inflation, which will have an impact on credit growth as well," Vir said. According to "There is no question of interest rates softening in short term and may harden (if the inflationary pressure continues)," said Bank of India Chairman and Managing Director T S Narayanaswami.

Dena Bank Chairman and Managing Director P L Gairola said interest rates are unlikely to come down in the short term.

"When the inflation stands close to 7 per cent, I do not see any case for the rates to come down," he said.

Source : PTI