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MUMBAI (Reuters) The Reserve Bank of India (RBI) laid the groundwork on Tuesday for a rise in interest rates by tightening credit to the commercial property sector, lifting its inflation forecast and warning of the threat of asset price bubbles.



As expected, the Reserve Bank of India (RBI) left key interest rates on hold but surprised markets by removing emergency liquidity support measures that were implemented to protect Asia's third-largest economy from the global downturn.



Stocks extended losses to 2.5 percent after the quarterly policy review and property shares fell 7.3 percent as the RBI raised bank provisioning requirements for commercial real estate loans.



"This could be one way for them to signal rate hikes are imminent. It is tightening of course," said Ramya Suryanarayanan, economist at DBS in Singapore.



Despite the tightening, government bond yields fell after the RBI raised the amount of deposits banks are required to keep in government securities, soothing worries about the market's ability to digest this year's record borrowing.



The RBI, which has been under pressure from government officials to maintain its loose monetary policy, kept its growth forecast for the fiscal year ending in March 2010 at 6 percent with an upward bias.



India's economic growth slowed to 6.7 percent in the year through March after three years of growth at 9 percent or more.



However, the central bank raised its fiscal year-end projection of wholesale price inflation to 6.5 percent from 5 percent, with an upward bias, reinforcing market expectations that the central bank will start raising rates early next year. Some economists see inflation hitting about 8 percent by March, much above the central bank's comfort zone seen at about 5 percent.


Publ.Date : Tue, 27 Oct 2009


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