Its that time of the year again - when bankers and bond dealers queue up to hear Reserve Bank governor, Y V Reddy announce the review of the monetary and credit policy. Will rates go up or down? CNBC TV18 polled the banking community to find out.

The central bank has aggressively tightened monetary policy since late 2004 to halt inflation led by robust industrial expansion and steep gains in global crude prices for a nation that imports about 75% of its petroleum needs. Analysts say that while price pressures remain in India's economy, the cumulative tightening of the past few years has slowed down spending by dampening credit growth.

It's a roulette policy say bankers who are wary of outguessing the RBI governor Y V Reddy. Yet this time around they point out that Reddy cannot hike rates, since the repo and the reverse rates have been practically held in abeyance by the RBI since June. However, 63% of the bankers polled say that the RBI may hike the Cash Reserve Ratio by half a percentage point to 6.5%. so as to reduce the excess liqudity. Yet bankers say this CRR hike will only effect a mild and temporary fall in bonds, while rates in the real economy continue to soften.

Also flush liquidity, apart from softening short-term money market rates, poses inflationary risks and also threatens to push credit growth back towards the peak of around 30% witnessed in the previous three years.
The liquidity has been largely on account of the RBI’s purchases of dollars from the market to check the rupee’s sharp rise. Though foreign fund inflows into equities have remained strong, overseas borrowings and foreign direct investment have equally contributed to a glut in inflows.

The rupee has appreciated by over 8.2% since March 31, 2007, severely denting the competitiveness of exports, which account for nearly 20% of the country’s GDP. The RBI’s need to sterilise liquidity infusions following its interventions in the foreign exchange market to stem the rupee’s sharp rise would have to entail measures for liquidity absorption. Analysts said the central bank’s inaction for a relatively long period, which caused the overnight call rates to remain closer to zero per cent, has sent confusing signals to the market. The call money rate closed at 0.2% today.

This time around bankers are more focussed on the reverse repo, the rate at which the RBI absorbs money from the banking system. Since March, RBI has only been absorbing Rs 3000 crore a day and this has led to money market rates crashing. Dealers say RBI may up this cap to say Rs 10,000 crores, some even believe the additional Rs 7,000 crores may be absorbed at a lower rate, making it a 2 tier reverse repo. However none believe the cap will be removed altogether.

India's economy grew by 9.4% in the last financial year and the central bank has forecast growth to slow to 8.5% this year. Analysts also said leaving rates on hold could act as a signal to commercial banks to start reducing lending rates. Bankers say even if the CRR is hiked or the reverse repo cap is raised, ample cash will remain in the system, forcing bankers to bring down rates. Only if both the CRR and reverse repo are tightened, rates are likely to remain where they are. So for the small borrower there may be good news after the policy.