RBI likely to keep repo rate unchanged

The Reserve Bank of India is likely to keep repo rate, the interest rate at which its lends to banks, unchanged at 8 per cent in its upcoming policy review on Tuesday.

According to economists, fears of deficit monsoon impacting food prices and a depreciating rupee making imports expensive, may force the RBI to opt for status quo.

However, to address the volatility in the money market the central bank may enhance the quantum of liquidity available under the term repo facility and relax the daily cash reserve ratio (CRR) maintained by banks. CRR is the slice of deposits (currently at 4 per cent) that banks have to park with the RBI.

Since taking over as RBI Governor in September 2013, Raghuram Rajan has raised the repo rate thrice by 25 basis points each to 8 per cent, to fight the inflationary pressures in the economy.

Cautious stance According to Shubhada Rao, Senior President & Chief Economist, YES Bank, the RBI is expected to leave the repo rate unchanged at 8 per cent. “While the RBI adopted a balanced tone in the June 14 policy review, we expect the central bank to remain cautious in the near term as cumulative monsoon deficiency of 24 per cent has led to a build-up of food price pressure; the impact of hike in railway fares is yet to come on board completely; and through crude oil, India remains exposed to ongoing geopolitical unrest,” she said.

Rao also pointed out that enhancement of the term repo window and a relaxation in daily CRR maintenance to 90 per cent from 95 per cent are some of the measures that could be explored by the RBI to ease frictional money market stress.

Going forward, the RBI could also look at reducing the statutory liquidity ratio (the slice of deposits that banks have to invest in Central and State government securities) from 22.5 per cent to 22 per cent (of deposits), she said.

In their weekly note, Bank of America Merrill Lynch India economists Indranil Sen Gupta and Abhishek Gupta, said they expect the RBI Governor to keep rates on hold.

“We have pencilled our first cut for December, if rains normalise, and in early 2015, in case of drought….

“We expect the RBI to either increase the frequency of variable rate repo auctions to have the flexibility to address intra-week unanticipated liquidity needs or reduce banks’ daily minimum requirements to, say, 80 per cent of CRR from 95 per cent now to accord them that flexibility,” the economists said.

Rupee and imports India Ratings & Research cautioned that an interest rate cut could trigger a rupee depreciation, affecting the coverage metrics of net importers. There have been instances where interest rate cuts by the RBI have been followed by 1.1-5.8 per cent rupee depreciation, it added.

Last week, the rupee weakened by over 110 paise, or close to 2 per cent against the US currency. It closed at 61.18 to the dollar on Friday against the previous close of 60.54.