Mumbai, April 09: Tighter monetary policy will have a limited impact on inflation in the current environment as its main causes are supply-side, Moody’s Economy.com said in a note on Friday.
The note also said the transmission of policy tightening to bank interest rates would be slow in the backdrop of ample cash levels in the banking system and a weak credit growth.
However, policy tightening would help push up money market rates, increasing the interest rate differential between India and other economies, attracting capital flows, which would strengthen the rupee and reduce import costs.
Moody’s Economy.com expects the Reserve Bank of India (RBI) to hike its key lending and borrowing rates by 25 basis points each and cash reserve ratio by 50 basis points at the April 20 policy review.
It expects the RBI to continue reducing excess liquidity in the banking system over the coming quarters to reduce inflation pressures as business investment picks up.
If the RBI moves as per forecast, there would be no impact on commercial bank interest rates as they currently hold surplus cash, according to the note.
If banks raise lending rates, borrowers would seek alternative non-bank sources for loans at a time when banks’ market share is already under pressure from bond issuance and foreign lenders, it added.
–Agencies