With a series of IPOs in the pipeline in the months to come, some of the major players like DLF will be a huge draw for international investors who may pump in a significant amount of dollars into the Indian economy... despite the rupee getting stronger vis-à-vis the dollar.
In such a scenario, it is strongly believed that the RBI would now attempt to sterilise the capital inflows by resorting to its time-tested measure, the increase in the CRR and Repo rates.
In fact, such a move is already being talked about at the moment, in the markets. But would it really happen now?
K. Ramanathan, head, fixed income, ING Vysya, feels that a hike is imminent, but it may not come as immediately as now. He estimates is that despite the fact that the inflow of Rs25,000 crore on Monday, things are evenly balanced.
He expects a Rs8,000 crore auction outflow tomorrow. In addition, he expect Rs6,000 to Rs10,000 crore auction under the market stabilisation scheme, to be announced by the RBI tomorrow. The outflow of this will happen next Wednesday. As a result of these aggregated numbers, the negative liquidity situation today; the Rs20,000 crore will be easily sucked out, he feels.
But seeing into the future, he predicts, "I see a 50 basis points hike in CRR in the next couple of months by RBI. The main reason being the DLF IPO and ICICI ADS, which will bring in huge dollar inflows and that needs to be sterilized. That's one of the reasons why RBI could look at hiking CRR In the next couple of months."
SS Tarapore, economist and former deputy RBI governor, told CNBC-TV18 in an interview, "I believe that the future course of the monetary policy in the next six months will be determined largely by the extent of capital flows. Now if the capital flows continue as they have done in the previous few months, one or possibly two rounds of monetary tightening are unavoidable."
Tarapore explains through an example. "Assume that you get capital flows of about Rs70,000 to Rs80,000 crore over a six-month period. The RBI would probably hold monetary growth within the range projected and you need to sterilize about 60,000 crore over the CRR and market stabilisation scheme.
When you do this, interest rates will go up. Now it's a moot point. The market stabilisation and CRR are much stronger instruments and they will result in increase in interest rates."
With such an agreement, all eyes will be focused on the RBI's moves on Friday.