Macro economy to determine RBI's future actions: Experts

The future RBI action on monetary policy will be guided by factors like inflation and economic growth, rather than reversing the soft stance taken to combat global financial crisis, which abated towards late 2009, say bankers and economists.

As such, reversal of soft monetary policy started by the Reserve Bank in October, 2009 has almost come to normal levels, they added.

In its first-ever mid-quarter policy review, the RBI on Thursday hiked the short-term lending (repo) rate by 25 bps to 6 per cent, but was more ruthless in raising borrowing rate (reverse repo) by 50 bps to 5 per cent in its bid to close the gap between these rates.

With this, the corridor between the two rates is down to one percentage point as was the case in the pre-global financial crisis era.
    
"The move shows the RBI efforts at continuing the process of normalisation of the monetary policy instruments by bringing down the wide difference between the lending and borrowing rates on the one hand and balancing out the real interest rate," Bank of America Merrill Lynch Chief Economist Indranil Sengupta said.
    
The narrowing down of gap between repo and reverse repo rates helps in reducing volatility in short-term rates like inter-bank call money rates.
    
This will also signal banks to raise interest rates, which are in negative when adjusted for inflation, and help them come to the positive zone.
    
"The economy has picked up and inflation is also trending up, the shift in the monetary policy stance from being accommodative is on expected lines," State Bank Chairman Om Prakash Bhatt said.
    
He added, "the short term rates are already up and the market-led tightening has now got reflected in the policy action, commensurate with the economy's fundamentals."
    
In Delhi, chief economic adviser Kaushik Basu described RBI's action to narrow the gap between the two short-term rates as good move that will bring in greater efficiency.
    
Terming the policy action as supportive of long-term growth, ICICI Bank Managing Director and chief executive Chanda Kochhar said, "RBI has stated the current policy rates are close to normal levels, indicating that the reversal from the accommodative stance adopted following the global financial crisis is almost complete."

Describing the move as efforts at reducing the corridor within which the money market rates operate, Dhanlaxmi Bank policy & research head Rajrishi Singhal said, "in fact, the central bank is quite explicit in stating that current and expected macroeconomic conditions -- high inflation, industrial growth, GDP growth and trade figures -- will be the more important considerations for future policy actions."
    
Both HDFC Bank Chief Economist Abheek Barua and Nomura India economist Sonal Varma said the move underpins RBI's resolve to curb volatility in short-term interest rates and thereby reduce the volatility in overnight call money rates, besides strengthening the monetary transmission mechanism.
    
The corridor or gap between these two rates was widened after October 2006 when inflation rose too high, leading to fears of overheating.
    
After the global financial crisis of 2008-09, RBI cut repo rate drastically to prevent market from panicking and to enable easy liquidity by keeping the reverse repo at a constant low.
    
Later, RBI reduced reverse repo rate to discourage banks from dumping their surplus cash with RBI and to encourage them to lend more. From a gap of 300 bps in July 2008, the corridor has been reduced to 100 bps today.
    
Singhal said, "RBI now feels the process of normalisation - taking the benchmark interest rates to their pre-crisis levels -- is almost complete and is likely to be a relatively less important factor in future policy formulations."
   
Nomura's Varma said, "We expect policy rate hikes to be the last this fiscal year. From its low in March, repo rate has been hiked by 125bps and reverse repo by 175 bps. Inflation has already started tapering off, and we expect a further decline in the coming months as input cost pressures ease,"
    
Overall inflation stood at 8.51 per cent in August, but food inflation shot up to 15.10 per cent during the week ended September four.