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The Reserve Bank of India (RBI)'s latest move marks the beginning of a gradual unwinding of the exceptional measures taken in mid-July. The central bank has effectively narrowed the monetary policy corridor to 200 basis points (repo: 7.5 per cent, MSF: 9.5 per cent) from 300 bps earlier.
Indeed, it can be argued that compared to the stance taken in July, at least from the perspective of banks' marginal cost of raising liquidity, the environment is now easier.
However, overall monetary conditions remain tight and it seems clear that RBI remains very focused, and rightly so, on containing inflation. The policy statement expresses the fact that RBI is clearly uncomfortable with consumer price inflation continuing at 9-10 per cent levels, as that keeps inflation expectations elevated, which, in turn, impacts consumer and business confidence.
In the coming months, if financial stability is maintained, the MSF rate will be cut, and eventually perhaps settle at 100 bps above the repo rate. We don't see any change in the repo rate this year, given lingering inflation risks. However, the rupee stability and inflation settling below six per cent could pave the way for meaningful monetary policy easing towards the end of the financial year.
Ravneet Gill
Chief Executive Officer, Deutsche Bank, India
