The Reserve Bank of India is likely to keep benchmark interest rates unchanged in its upcoming policy in the light of moderating inflation and adverse impact of global turmoil on liquidity, a Citigroup report said.
"With headline inflation moderating coupled with the global turmoil, the odds of the RBI keeping rates on hold are also rising," the report said.
RBI could ease monetary policy by mid-2009 when inflation moderates to the 8 per cent level, it said.
While the US liquidity shocks didn't help, the tight funding conditions have more to do with India-specific factors, brought about initially by RBI tightening moves to fight soaring inflation, it said.
Domestic liquidity conditions, which have remained in the deficit mode since the last few months, took a turn for the worse due to currency intervention to stem rupee weakness caused by capital outflows and also outflows on account of advance tax payments and bond auctions, it added.
But funding conditions should improve with the new RBI liquidity measures and as the government steps up the disbursement of funds parked with the central bank.
In an effort to ease inject liquidity in the system, it said, RBI indirectly reduced the statutory liquidity ratio (the amount banks must invest in government bonds) to permit greater access to liquidity under the liquidity adjustment facility as well as conducting LAF twice daily starting from September 16.
In addition, RBI also raised the interest rate cap on non-resident deposits to attract capital flows.
The government and hiked the overseas borrowing cap for infrastructure companies from $100 million to $500 million for rupee expenditure.
During the fiscal, the RBI had hiked CRR four times while repo rate thrice to tame inflation. Since the beginning of the current financial year, CRR was raised by 1.5 per cent while repo rate was raised by 1.25 per cent.
RBI last increased the short-term lending (repo) rate by 50 basis points to 9 per cent and also raised the mandatory deposits that banks have to park with it by 25 basis points.
Earlier this month, Goldman Sachs in its report also said further hike in interest rate by the RBI seems to be a remote possibility.
"We think that the interest rate cycle has peaked. With commodity prices coming off, clear signs of demand slowing, and our expectations that inflation will fall significantly in early-2009, the case for raising rates has weakened considerably," the report said.
Further, given the current global environment of tight liquidity and the central banks move last week to ease liquidity conditions, any further cash reserve ratio hike is firmly ruled out, it said.
The rate cut is likely to happen in the January-March quarter of the current fiscal.
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