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RBI monetary policy may hold rates, tighten norms

India's annual monetary policy is likely to eschew big rate cuts when it is unveiled on Monday against a background of religious violence expected to hamper economic reforms, analysts and bankers say.

The thrust of the Reserve Bank of India's policy for the financial year which began on April 1 is expected to focus on tightening accounting norms for banks and restructuring the debt and money markets.

There could be cuts in the cash reserve ratio, the percentage of funds banks must deposit with the central bank, to ensure banks have enough money in case economic activity picks up. But most analysts expect the reductions from the current 5.5 per cent to be phased in as money market liquidity is good.

"One should not expect the policy to lead to an economic revival," said Mahesh Vyas, executive director at independent forecaster Centre for Monitoring Indian Economy.

"What the economy is suffering from at the moment is a lack of demand, both consumption and investment, and I do not see what the RBI's policy can do about either," he said.

Vyas said the key to a pick up in growth was government initiatives to reform the agriculture and infrastructure sectors, but that appeared unlikely in the current climate.

That means the economy of the world's second-most populous nation will continue to chug along, growing at a minimum of five per cent this year. While impressive by global standards, it is well short of the spectacular rates of over 7.5 per cent hit for three straight years in the mid-1990s.

POLITICS

While the central bank is autonomous, its thinking is unlikely to be significantly at odds with the finance ministry's, bankers say.

For the coalition government, under fierce criticism over its handling of the country's worst religious bloodletting in a decade, any economic decision making is likely to be laced with a liberal dose of caution, they say.

The rioting in Gujarat, which has lasted for nearly two months, has already claimed more than 800 lives and has shown no signs of easing.

Few commentators expect the coalition government to be unseated but most fear that it will be forced to abandon reforms and opt for populist compromises to survive.

Already concerns abound the government may reverse cuts in interest rates on huge state-run public savings schemes. That could quash hopes of reductions in the central bank's benchmark bank rate, a key reference for commercial bank rates.

Still, there are some factors that call for the central bank to lean towards an easing.

The external sector looks sound with foreign exchange reserves of nearly $55 billion, suggesting any unexpected volatility on the exchange rate front can be tackled.

Domestic price stability also looks to be assured, at least for the near term, with inflation running close to historic lows and no signs of a pick up in demand.

PROBLEMS

"The problem is that the structure of our economy is not similar to those of developed countries," said R Ravimohan, managing director at the Credit Rating Information Services of India Ltd, the country's leading rating agency.

"The economic downturn in the United States was reversed by a series of aggressive rate cuts but here -- where consumption demand is still not funded much through credit -- rate cuts may not have a similar effect," he said.

Analysts note fresh investments were unlikely to pick up in the near future due to excess capacity.

Ravimohan expected the RBI to broaden the gilts market to make it more liquid and attractive to retail investors.

It could also tighten norms on banks' investment in securities issued by state governments, amid worries about defaults.

The central bank's policy is also expected to take note of a possible crisis brewing in the cooperative banking sector, which was plagued by scandals last year.

One cooperative bank is being investigated for suspected wrongdoing in the government securities market and media reports say other cooperative banks and bond brokers could be involved.

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