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RBI to maintain key rates, guidance on liquidity important

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Repo rate has been kept at a record low of 4 per cent since May 2020

The Monetary Policy Committee is widely expected to keep the repo rate unchanged on Friday to support a growth rate correction, but some analysts cited a slim possibility of the Reserve Bank of India providing an indicative hike in the reverse repo rate. Have given.

All 60 forecasters in a Reuters poll said they do not see any change in the repo rate as of October 8. And though the price pressure has increased due to rising fuel prices, the RBI is expected to raise the repo rate only in April-June 2022.

Madan Sabnavis, Chief Economist, CARE Ratings, wrote, “In the upcoming policy meeting, we do not expect surprises on the policy rate front at a time when the economy is expected to witness the much-anticipated growth in consumption on the back of festive demand.”

“While the possibility of an increase in the reverse repo rate cannot be ruled out, it is unlikely to be a part of this statement,” he added.

In the minutes of the last policy meeting in August, external member Jayant Verma argued for the need to raise the reverse repo rate to contain rising inflationary pressures.

However, RBI deputy governor Michael Patra said in a speech in September that inflationary pressures were still being driven by supply shocks and would only ease gradually.

Talk of an outright possibility of a reverse repo hike has risen in recent times when the RBI has set higher-than-expected cut-offs in variable rate reverse repo auctions, which traders called out from lower yield levels indicating RBI’s discomfort. as seen. .

The repo rate, after being cut by 115 basis points (bps) in early 2020, has been at a record low of four per cent since May 2020, while the reverse repo rate was reduced by 155 bps to 3.35 per cent.

Inflation is projected to remain well above the RBI’s medium-term target of 4 per cent, according to the latest survey, but was projected to remain below the 6 per cent upper limit until at least the end of 2024.

Traders will be closely monitoring the RBI’s guidance on liquidity withdrawals in recent weeks with surplus cash in the banking system at over Rs 10 trillion.

Arun Srinivasan, Head of Fixed Income, ICICI Prudential Life Insurance, said, “Given the flush liquidity in the system, the chances of RBI announcing another GSAP (Government Securities Acquisition Programme) for the next quarter are clearly slimmed down. “

“Even if RBI announces, it will be in the form of Operation Twist, which RBI has resorted to recently,” he said.

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