Monetary Policy Committee May Hold Rates on Friday

Mumbai: With domestic growth holding up and the external environment turning supportive, aided by the US-India trade deal, economists expect the central bank's rate-setting panel to keep its benchmark repurchase rate unchanged at 5.25 per cent on Friday and turn towards liquidity management and monetary transmission. While the Monetary Policy Committee (MPC) of the RBI has cut interest rates by 125 basis points since February last year, including a quarter point in December and proactively injected Rs 6.6 lakh crore in the current fiscal as part of open market operations (OMO), bond yields are refusing to budge down.

According to an Emkay report, only 9 per cent of the rate cut transmission is visible in bond yields in this cycle, with the 10 year benchmark yield down merely 11 basis points in the cycle compared to 88 per cent in the 2019 cycle of eight months and an average of 83 per cent for the past four easing cycles.

Says Sujan Hajra, chief economist and executive director, Anand Rathi Group, "With GDP growth expected to moderate modestly, but potential growth being supported by sustained public-sector capex and the boost from two major trade agreements, the monetary policy calculus remains finely balanced. A calibrated uptick in retail inflation further limits the case for near-term easing. In this context, the MPC is likely to stay in wait-and-watch mode, keeping the repo rate on hold, as the RBI’s room for additional cuts remains constrained."

"Instead, policy focus is expected to shift toward liquidity management and yield-curve stability, particularly in light of the Union government’s Rs 17.2 trillion gross borrowing programme. Active management of system liquidity and bond-market spreads will be far more critical than adjustments to the policy rate. Accordingly, no material change in the policy stance or the RBI’s macroeconomic projections is expected at this meeting," added Hajra.

According to Bloomberg, banks have sought permission to free up some of the cash they have to park with the RBI for short-term financial stress requirements. Meetings between the RBI and several banks took place over the past two weeks, they said.

India's economy is set to expand at over 7 per cent for a second straight year beginning April and the rupee posted its biggest rally in seven years post the announcement of the US-India trade deal this week.