RBI MPC meeting: RBI is unlikely to change interest rates.
Twelve respondents unanimously predicted that the Monetary Policy Committee (MPC) would keep the key interest rate unchanged at 6.50% at the end of its meeting on February 8.
They said the panel would keep rates unchanged for the sixth consecutive session. The repo rate is the rate at which the RBI lends funds to banks.
However, regarding the policy stance of the Monetary Policy Committee, respondents’ expectations were different, with the two institutions predicting a change in stance from the existing stance of withdrawing ‘adjustment’ to ‘neutrality’. Several respondents said the RBI’s language may suggest that tolerance for liquidity conditions is gradually easing. Especially since recent central bank capital injections are moving in that direction.
“We expect the committee to maintain its monetary policy stance of maintaining the monetary policy stance despite the deficit liquidity situation,” said Rahul Bajoria, head of emerging markets Asia economics at Barclays.
A neutral monetary policy stance would provide more flexibility in the RBI’s liquidity management as it could take steps to ease or tighten financial conditions, unlike its current stance, which focuses on reversing explicitly accommodative conditions. Taking an easing stance allows central banks to increase the money supply to stimulate economic growth.
The RBI has injected large amounts of liquidity into the banking system during 2020-21 to keep borrowing costs low and boost demand amid the Covid-19 crisis. In April 2022, the MPC moved towards withdrawing its easing stance for the first time. With surplus funds gradually depleted over the past six months, the banking system has been experiencing a liquidity deficit situation, with the amount borrowed by banks from the RBI crossing a multi-year high of ₹3 lakh crore in January.
“From a broader economic and stakeholder perspective, it may make sense for the RBI MPC to complement its inflation-easing fiscal stance with a dovish pivot,” economists at ICICI Securities Primary Dealership said. Neutral.
Lack of liquidity has kept the weighted average call rate (WACR) and other overnight funding instruments consistently well above repo rates. According to the RBI’s monetary policy framework, the WACR should be in line with the repo rate. Rising money market rates have led to higher interest rates on commercial paper and certificates of deposit, which companies and banks use to raise funds.
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