- Wealth PMS
The RBI, in it’s mid-term policy review, has not changed rates. The repo rate remains at 7.75%. This is the rate at which banks borrow overnight from the RBI. Let me decode the statement in simple terms.
The repo rate at 7.75% sounds good, but the rate that is now the “operational” rate is the 14 day “bid-for” repo auction. Banks place bids on what rate they can borrow money for 14 days, and the weighted average is taken. Liquidity has eased up, with rates around 8% in general.
While inflation is a serious issue, the RBI would like to wait. In this, I don’t disagree, because it looks like the trajectory of interest rates is coming down in the near term.
What they say next is interesting:
There are obvious risks to waiting for more data, including the possibility that tapering of quantitative easing by the US Fed may disrupt external markets and that the Reserve Bank may be perceived to be soft on inflation. The Reserve Bank will be vigilant. Even though the Reserve Bank maintains status quo today, it can help guide market expectations through a clearer description of its policy reaction function: if the expected softening of food inflation does not materialise and translate into a significant reduction in headline inflation in the next round of data releases, or if inflation excluding food and fuel does not fall, the Reserve Bank will act, including on off-policy dates if warranted, so that inflation expectations stabilise and an environment conducive to sustainable growth takes hold. The Reserve Bank’s policy action on those dates will be appropriately calibrated.
Basically – Don’t expect rate hikes to be on policy dates only. If things worsen, we’ll act in between also. This is excellent work from the RBI!
Overall, the policy has no real impact.The bigger thing is tonight – the big bad Fed move to taper or not to. I think we see a no-action there as well.