More reviews to eliminate surprise

To reduce uncertainty in key policy rate movements, the Reserve Bank of India (RBI) will conduct a mid-quarter review of monetary policy, in line with the practice followed by central banks in advanced economies.

From September, RBI will review policy after 45 days, instead of every 90 days at present. “Mid-quarter reviews are intended to communicate our assessment of economic conditions more frequently. By instituting these, it is our intention to take the surprise element out of off-cycle actions,” the central bank said in the policy statement.These will be held in June, September, December and March.

Madan Sabnavis, chief economist with ratings agency CARE, said RBI was trying to remove surprises as much as possible. “This is a step towards global practices. The US Federal reserve conducts a review eight times a year and the Bank of England has a monthly review,” he said.

A treasury head of a bond house said RBI was trying to be as transparent as possible. “Yet, the issue of effectiveness of monetary action remains. Should the central bank surprise the market with action to have a desired impact or make a formalised process of review which gets discounted by the market?” he asked.

RBI, however, has the flexibility to take swift and pre-emptive policy action as and when warranted by evolving macroeconomic developments.

“Mid-quarter reviews will cut uncertainty and give an idea of RBI’s concerns during the quarter, given the kind of changes emanating from international and domestic markets,” said YES Bank’s chief economist, Shubhada Rao.

Banks said with uncertainty prevailing in the international market, this was a step in the right direction. “It will initially increase excitement in the market. There were too many rate hikes during the quarter. It is moving towards what is expected to be a good way of assessing the policies,” said Jahangir Aziz, chief economist, JPMorgan.

Economists expect another 25 basis point increase in repo and reverse repo rates in September. During the first quarter review, while the cash reserve rate was unchanged at six per cent, the repo (rate at which banks borrow from RBI) and reverse repo (rate at which RBI borrows from banks) were increased by 25 and 50 basis points to 5.75 per cent and 4.5 per cent, respectively.