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RBI may maintain status quo on repo rate, CRR in policy review

External sector, inflation remain key concerns

Abhijit Lele & Neelasri Barman  |  Mumbai 

The Reserve Bank of India (RBI) is expected to keep the repo rate and the cash reserve ratio (CRR) unchanged in its first quarter monetary policy review as it observes the effects of the steps it took to curb the rupee volatility, according to a BS poll.

The predominant view emerging from the poll of 10 bankers, economist and rating agencies indicated that along with inflation and growth, the rupee volatility has also become an important factor for RBI. The central bank will like to monitor the impact of the steps it took last week (July 15).

Repo rate is the rate at which RBI lends short-term money to banks, while CRR is a portion of deposits that lenders keep with the RBI which does not attract any interest.

In the annual policy, RBI reduced the repo rate by 25 basis points to 7.25 per cent. The first quarter review of the monetary policy is slated on July 30.

The rupee has stablised and bond market yields have moderated after witnessing a sharp rise last week, in response to liquidity curbs, said bank executives, economist and rating agencies.

N S Venkatesh, head of treasury and chief general manager at IDBI Bank, said, “Whatever decision RBI had to take on interest rate happened on July 15 night”.

RBI has put a curb on borrowing at the liquidity adjustment facility (LAF) and jacked up the lending rate for taking money through the marginal standing facility (MSF). RBI had to address the currency speculation that was being funded out of short-term borrowings, he added.

Gaurav Kapur, senior economist, RBS, said RBI might not make any change in policy rates and CRR. They chose to use quantitative route to tighten liquidity in the system.

Madan Sabnavis, chief economist at rating agency CARE, expects status quo in monetary review. “The government has made a slew of announcements on reforms to attract foreign investment, but there is very little movement on the ground. The economy is stagnating,” he said.

Hinting at a status quo on the rate front, minister P Chidambaram in an interview with Bloomberg said RBI’s move to raise two of its interest rates while keeping the main repurchase rate unchanged doesn’t signal a shift toward a tightening bias. Chidambaram was in Moscow, to attend a meeting of the Group of 20 ministers and central bankers. Radhika Rao, economist, DBS Bank said in a scenario of recent measures on liquidity tightening, the hint is towards tight monetary policy rather than loosening it. “Inflation is also high. I do not expect any cut in the repo rate or in the CRR,” she said.Rating agency Icra said it expects the RBI to keep the repo rate and CRR unchanged, to guard against further rupee depreciation. The growth-inflation dynamics and concerns regarding the funding of the current account deficit have dominated the setting of monetary policy.

The volatility in the exchange rate of the rupee has now emerged as a key factor and influence RBI’s actions, because of its attendant implications on macro-economic stability.

First Published: Tue, July 23 2013. 00:30 IST
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