RBI may leave policy rates unchanged on July 30

Published: Monday, July 29, 2013, 9:05 [IST]

The RBI has developed a habit of taking the money, stock and forex markets by surprise, while stunning bankers by squeezing liquidity in the banking system, when its least expected.

It meets once again on July 30 to decide on Monetary measures. Analysts and bankers believe that the RBI would maintain status quo on Tuesday, after having squeezed large amounts of money in the last 3 weeks to drain money from the banking system to prevent a slide in the Indian rupee.

Almost a week back, RBI told banks that they would be permitted to borrow under the liquidity adjustment facility (LAF) only up to 0.5 per cent (lowered from one per cent) of their net deposits and time liabilities at the benchmark interest rate of 7.25 per cent.

Additionally, RBI has tightened rules on the cash reserve ratio (CRR), or the percentage of deposits banks must keep in cash with the central bank.

After undertaking these measures its almost certain that the RBI would not loosen monetary policy by either reducing the repo rate nor the CRR rate. Otherwise, it would nullify all of the steps taken in the last few weeks in defence of the rupee.
In fact, economists and analysts are worried that the RBI may even hike CRR or increase repo rates. It looks a remote possibility, but, if the RBI does hike the CRR and increase repo rates, it could certainly force banks to hike interest rates, which means economic growth could trend lower in the coming quarters.

It's a difficult call for the RBI with inflation threatening to rear its head once again, rupee looking vulnerable and growth hitting a decade low.

GoodReturns.in

Story first published: Monday, July 29, 2013, 9:05 [IST]

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