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RBI may not increase interest in September. India's rating too could improve


RBI may not increase interest in September
RBI may not raise interest rate in September as commodity prices are cooling which it considered at high risk. Investors are getting risk-averse.

India"s bond market is rallying as the US was dethroned from the position of top credit ratings. But on the adverse side, this has sent the equity markets in India for a tail-spin. Many domestic stocks neared there 52-week low, this has in turn affected the investors sentiments on the negative side.

Benchmark rupee-denominated 10-year treasury bonds rose as Sensex, the stock index of BSE, dropped from its November peak by approximately 20%. R Gopalan, secretary of economic affairs at the Finance Ministry was quoted by the media that a fall in commodity prices due to slowdown in global economy could cut inflation. There are views that such a move can help improve its deficit and contain the rise of interest rates. This in turn can improve its rating with the rating agencies along with investor sentiments.

According to a Bloomberg report, "Traders in the interest-rate swap market are locking in one-year rates at a discount to the central bank"s 8 percent policy rate after demanding a premium a week ago." A clear reversal in sentiments. The only plausible reason for this could be the Standard & Poor's down-grading of US debt from AAA to AA+.

Meanwhile the Reserve Bank of India has proved itself to be a disciplined bank as it has raised the interest rate 11 times since March 2010. This is the highest by any Asian government. These measures were taken with the aim to cool inflation, which stands at 9.44%.

Some analysts' opine that with declining commodity prices and world-economies slowing down there is every possibility that inflation will climb down, therefore, the Reserve Bank of India may not increase interest rate in September.


This argument is backed by showing global energy prices, which the central bank had earlier cited it as a major risk factor for Indian inflation. Since July 26, oil prices have fell. At one point, crude oil futures was trading at $80.81 per barrel yesterday, reflecting a fall of 12% this year.

Story first published: Tuesday, August 9, 2011, 11:00 [IST]
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