RBI officials have already expressed their intolerance to the current inflation levels. But what’s adding to the problem is the rise in capital flows to India. “Rising capital flows and high credit offtake will continue to vex the central bank. But this can be tackled over a period of time. Indications have already come about restricting inflows from external commercial borrowings. There could be further tightening of loans to sensitive sectors,” said a senior banker.

Tarini Vaidya, country treasurer of Centurion Bank of Punjab said, “I don’t think the RBI will increase the rates in the credit policy. It will wait and see the impact of the past actions. As the situation is very fluid, the RBI is likely to act according to the prevailing situation. I feel the RBI is likely to maintain its hawkish stance on various issues...” The central bank has already made three rounds of hikes in short-term rates in the last one year. The second phase of CRR hike announced on March 30 will come into effect only on April last week.

With the inflation level ruling above the six per cent level and the liquidity level still high, banking analysts don’t think the RBI is through with its measures. “The RBI will remain hawkish. But it’s likely to maintain cash reserve ratio, reverse repo rate and statutory liquidity ratio at the current levels on Tuesday. At the most, the RBI might increase the repo rate as the spread between repo and reverse repo rates has increased,” said Sarika Purohit Lohra, banking analyst with Angel Broking.

Signals from the Mint Street indicate that there could be some restrictions on external commercial borrowings (ECBs) by corporates. “The government and the RBI should not put brakes on growth. Companies with genuine investment plans should be allowed to raise funds from abroad. They can put curbs on companies which raise money without proper investment plans,” said Care Ratings executive director D R Dogra ruling out any hike in rates.

In fact, capital flows have been rising as never before, adding to the burgeoning foreign exchange reserves of $202 billion plus. Net capital flows to India have more than doubled to $27.34 billion during the period April-December 2006, thanks to a surge in external commercial borrowings and non-resident Indian (NRI) deposits. The RBI, however, was not absorbing dollars from the market, thereby allowing the rupee to rise.

Higher recourse to ECBs was enabled by lower spreads on external borrowings and rising financing requirements for capacity expansion domestically. Consider these figures. As much as $9.1 billion came through ECBs as against an outflow of $1.21 billion in the previous year. Owing to high interest rates, NRI deposits surged by nearly 188 per cent to $3.2 billion during the April-December period from $1.11 billion in the previous year.

According to a banker, the RBI is likely to tighten bank exposure to the real estate and capital market segments further. It had increased the provisioning norms for exposure to commercial realty, personal loans and credit cards three months ago. The finance minister has already asked the public sector banks to moderate credit flow to real estate and capital market.

Rates may tighten further: Assocham survey

NEW DELHI: According to a survey by industry body Assocham, CEOs of various companies feel that RBI would take further measures to tighten the monetary flow as the credit growth continues to remain much above 20 per cent desired by the central bank. The heads of real estates, housing finance and automobile companies who were surveyed, said that there is a possibility of another hike in the cash reserve ratio and repo rates.

Eighty five per cent respondents to the survey feel that RBI would tighten the flow of credit in real estates as this sector has witnessed maximum increase in prices. Other sectors such as construction, automobiles and banks would also be affected by the hike in interest rates, the survey said. Sixty per cent of the 150 corporate heads and economists across different sectors were not sure whether the interest rates have peaked and RBI would not be tempted to further tighten the money supply. However, 40 per cent respondents felt that interest has already touched a peak. — ENS