RBI holds its key rates in move to drain excess cash

The bank said that the decision of the committee is consistnt with a neutral stance of monetary policy in consonance with the objective of achieving the medium term target for retail inflation of 4% within a band of +/-2%, while supporting growth.

"We are in continuous dialogue with the government to institute a Standing Deposit Facility, which is a response to the expert report (headed by him when he was the deputy governor), and also draws from best global practices and recommendation of the expert committee", Patel said. Its impact on the liquidity overhang was, however, partly offset by a significant decline in cash balances of the Government up to mid-March which released liquidity into the system.

"With RBI remaining relatively hawkish on the inflation trajectory, we expect RBI to stay on a longish pause", IDFC Bank's chief economist Indranil Pan said.

The higher reverse repo rate will make it lucrative for commercial banks to park their excess funds with the RBI.

Speaking about the unchanged repo rate, RBI Governor said: "It is important to note three significant upside risks that impart some uncertainty to the baseline inflation path - the hardening profile of worldwide crude prices; volatility in the exchange rate on account of global financial market developments, which could impart upside pressures to domestic inflation; and the fuller effects of the house rent allowances under the 7th Central Pay Commission". And the RBI too has reversed its policy stance from accommodative to neutral.

Tracking weak global markets and Reserve Bank of India's move to keep key lending rates unchanged, Indian benchmark indices slipped from record highs and closed Thursday's trading session with marginal declines.

Patel had said he would wait for more clarity on the inflation trend and impact of demonetisation on growth before making change in the key policy rate.

Sovereign bond yields climbed the most in two months Thursday after the RBI lifted the reverse repo rate to 6 percent from 5.75 percent.

The monetary authority said it is anxious on three fronts on the inflation and the general economy: A possible el nino impact on the monsoon, the GST implementation, and seventh pay commission award.

However, it raised the reverse rate to 6 percent from 5.75 percent.

That could be a precursor to drain liquidity, with the RBI saying it could undertake measures including additional treasury bill sales, or outright bond sales via open market operations.

Meanwhile the rupee strengthened to 64.52, its strongest level against the dollar in 20 months, from its 64.88 close after the RBI held rates, in line with other Asian central banks this month that have opted to do the same.

"The GVA growth forecast for 2017-18 has been put at 7.4 per cent, which indicates that recovery is expected to gather pace in the current financial year", said industry chamber Ficci President Pankaj Patel in a statement.

RBI, however, said that the problem of stalled projects continues mainly because of lack of environmental and non-environmental clearances.

Bhattacharya expects a prolonged pause in monetary policy and says much would depend on the outcome of the monsoon.

(Copyright © 2015. All Rights Reserved.)

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