RBI likely to hold policy rate

The reverse repo rate was raised to 6 percent from 5.75 percent while the benchmark repurchase rate was kept steady at 6.25 percent, the Reserve Bank of India said in a statement in Mumbai on Thursday, citing excess funds in the banking system after the government's clampdown on cash.

To ease this, the RBI governor Urjit Patel committee on monetary policy had suggested the creation of special deposit facility (SDF), which is a kind of non-collateralised liquidity parking instrument.

India's central bank on Thursday said it has allowed banks to invest in real estate investment trusts (REITs) and infrastructure investment units (InvITs) within regulations prescribed by the capital markets regulator. The markets were expecting some action from the RBI on the persistent excess liquidity which was keeping the overnight and short term money market rates well below the policy repo rate.

One significant change announced by the RBI in its first monetary policy rate review of 2017-18 is to narrow the policy rate corridor, the gap between the rate at which the RBI will accept short-term deposits from banks and the rate at which the RBI will lend short-term money to banks, from one percentage point to half a percentage point.

Icra's Naresh Takkar said policy tone with focus on inflation points that the RBI may be on hold through out 2017. Analysts attribute the rupee's gains to the RBI's decision in two policy reviews this year to keep repo rate unchanged. Banks have reduced lending rates, although further scope for a more complete transmission of policy impulses remains, including for small savings/administered rates.

On the domestic front, several economic indicators are pointing towards a modest improvement in the macroeconomic outlook including higher food grain production, IIP for January and manufacturing PMIs for February and March. This is the RBI's third policy decision, taken by rate-setting MPC, set on the lines of Federal Open Market Committee (FOMC) in the United States, since its establishment in October 2016.

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"It is clear that we are at the end of the rate-cutting cycle". The move to raise the reverse repo rate "is more to bring the overnight money-market rates closer to the repo rate", he said.

"Underlying inflation pressures persist, especially in prices of services", RBI said in the statement, reiterating its neutral stance.

Noting that excluding food and fuel, inflation has been unyielding at 4.9 per cent since September, the RBI said: "The Committee is of the view that the persistence of inflation excluding food and fuel could set a floor on further downward movements in headline inflation and trigger second-order effects".

On the gross value add (GVA) basis, RBI sees the economy accelerating to 7.4 per cent in the current fiscal, up from 6.7 per cent in 2016-17. "I think, were largely sorted out", said Joseph Zvegllich, director at the Asian Development Bank's macroeconomics research division.

Justifying the need to create such banks, the Reserve Bank said that these sectors traditionally remain deprived of regular bank credit over asset-liability mismatch issues. "The RBI expects an increasing inflation trajectory and they seem to be adequately preparing for an improving capex cycle and well as liquidity lowering measures in the USA".

  • Ronnie Bowen