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Growth Stance: MPC to hold rates despite excess liquidity

Growth Stance: MPC to hold rates despite excess liquidity

By Rohit Vaid

Mumbai, Oct 6 (SocialNews.XYZ) The Reserve Bank of India will retain key lending rates as well as maintain the accommodative stance to support growth during the upcoming monetary policy review, say experts.

 

On the other hand, the central bank might indicate a timeline for commencing solid tapering measure in addition to variable reverse repo rate (VRRR) operations to withdraw excess liquity, thereby, staving off inflationary pressure.

In a poll conducted by IANS, economists and industry experts cited inflationary pressures as a key factor halting any further monetary policy easing.

"No rate cut is expected but the RBI may announce measures to address liquidity overhang in the system," India Ratings and Research's Principal Economist, Sunil Kumar Sinha, told IANS.

At present, the MPC of the central bank has maintained the repo rate, or short-term lending rate, for commercial banks, at 4 per cent.

Besides, the reverse repo rate was kept unchanged at 3.35 per cent.

"No rate or stance change is expected, but some indication of liquidity normalisation might be indicated," ICRA Chief Economist Aditi Nayar said.

Currently, the RBI conducts VRRR auctions to absorb surplus liquidity from the banking system.

It has been conducting a 14-day VRRR auctions as its main liquidity operation.

As per estimates, the surplus liquidity in the banking system stood at Rs 8.5 lakh crore as of August 4.

In addition, the RBI had carried out GSAP operations of Rs 25,000 crore each in two more instalments, alongside an OMO sale operation.

"RBI's liquidity conundrum is finding little respite. While the current liquidity flux looks somewhat sticky, the RBI has started to take steps to at least stop further infusion," Emkay Global Financial Services Lead Economist Madhavi Arora said.

"With sterilisation of its last GSAP instalment, the VRRR' quantum and pace might see a pick up in the coming quarter."

Acuite Ratings & Research Chief Analytical Officer Suman Chowdhury said: "Unlike most developed and peer nations, the headline CPI inflation in India has moderated in Jul-Aug'21 due to lower food inflation and the short term outlook on inflation remains benign."

"While the spectre of high crude oil prices will continue to hold up the inflation risks, the latest inflation data will provide some relief to the MPC."

The base effect, along with lower food prices, have eased India's August retail inflation on a sequential, and year-on-year basis.

The Consumer Price Index (CPI) had slipped to 5.30 per cent in August from 5.59 per cent in July.

Even on YoY basis, August 2021 retail inflation was lower than 6.69 per cent recorded for August 2020.

Brickwork Ratings Chief Economic Advisor M. Govinda Rao said: "With the consumer price inflation easing from 5.59 per cent in July 2021 to 5.3 per cent in August 2021, improved supply situation on the back of the pandemic-led restrictions being relaxed, and capacity utilisation still in the recovery mode, there is no immediate pressure on the MPC to either alter interest rates or change the accommodative stance."

(Rohit Vaid can be conatcted at rohit.v@ians.in)

Source: IANS

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Growth Stance: MPC to hold rates despite excess liquidity

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