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J P Morgan's report hints at RBI easing short-term interest rates

The slide in wholesale price inflation by over 3.50 per cent from its peak in November, considerable improvement in sentiment towards the rupee and expectations of continued stability in the financial markets have raised the chances of easing of short-term interest rates by the Reserve Bank of India.

Leading investment banking firm J P Morgan, in its latest Indian Markets Outlook report, has said that there is no compelling reason to continue with the high repo rate of 8 per cent. The continued stability in the foreign exchange market since August 1998 (when the RBI squeezed liquidity in the system to defend the rupee) is a case in point, it said.

''The 1 per cent hike in cash reserve ratio and 3 per cent in the repo rate effected in August 1998 were solely for the purpose of defending the currency (rupee) and checking speculative forces,'' says the report.

The report feels that reduction in the repo rate will not only soften yields at the short-end of the curve, but also help banks' year-end valuation.

The steep rise in call money rates does not dilute the possibility of a repo rate reduction. ''The tightening in call rates has been largely on account of certain technical factors and does not dilute the possibility of repo rate reduction,'' says the report.

Call rates may rule firm this week and any further dip in security prices should be looked as an opportunity to enlarge positions at the near end of the curve.

Although cash flows for the coming 14 days show a fairly comfortable situation with a net surplus of nearly Rs 25 billion, this amount might just be enough to wipe out the existing shortage of funds in the banking system.

The report further says that any increase in lendable funds of banks will be more than countered by primary dealers replacing RBI refinance with overnight borrowing if the overnight rates dip below the bank rate.

Credit-offtake is expected to improve in the January-March period, which would be a significant drain on liquidity in the coming weeks, says the report.

UNI

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