RBI policy review: Amid focus on cash control, rate to remain unchanged
By Team Legistify / 2017-04-06

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There is near unanimity that the six-member monetary policy committee of the Reserve Bank of India (RBI) would keep policy rates unchanged, but this being an annual policy, the event promises to discuss many issues that would set the stage for the next one year, including bad-debt resolution and liquidity management.

The repo rate is at 6.25 per cent now, while the RBI has changed its stance to 'neutral' from 'accommodative', indicating pause in a rate-cutting cycle. Core inflation, which is consumer price index (CPI) minus food and fuel, is sticky at around five per cent, even as the headline CPI has fallen below four per cent, well within the target of RBI. However, economists say uncertain monsoon can flare up prices and, therefore, the central bank would likely wait before deciding the way for rates to go. Meanwhile, the focus would be to continue to nudge banks to cut lending rates.

The most important issue that the economists would keep an eye on would be the central bank's take on the liquidity situation and measures to safeguard the RBI balance sheet should the huge amount of excess liquidity be parked with the central bank. The central bank has to mortgage an equivalent amount of bonds against the money that it receives in the reverse repo window. RBI has a bond holding of about Rs 7 lakh crore. Of this, a sizeable portion has to be kept as collateral against government cash balances and some more as a buffer. To ease this, the RBI governor Urjit Patel committee on monetary policy had suggested the creation of special deposit facility (SDF), which is a kind of non-collateralised liquidity parking instrument. Economists expect the central bank to spell out the creation of such an instrument in this policy. On a net basis, banks are parking more than Rs 3 lakh crore of their excess liquidity with the central bank. A month into demonetisation, banks had parked more than Rs 5 lakh crore of their excess liquidity with RBI, after which the central bank increased cash reserve requirement (CRR) on incremental deposits to 100 per cent, from the norm of four per cent. CRR is the portion of deposits banks have to maintain in cash with the central bank. SDF can solve this problem.

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