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With signal on rupee stability getting top priority, Reserve Bank of India may keep the repo rate and cash reserve ratio (CRR) unchanged in the first quarter of review of monetary policy tomorrow.
Shubhada Rao, chief economist, Yes Bank said the language of the Macroeconomic and monetary developments (MMD) review indicates that RBI may not reverse liquidity tightening steps in few weeks which it took in July. It may not change the repo rate (which stands at 7.25%) and CRR (4%).
Rating agency ICRA said it expects the RBI to keep repo rate and CRR unchanged to guard against further Rupee depreciation.
The repo rate is rate at which RBI lends money to bank for overnight use and CRR is portion of deposits that banks keep with RBI in cash.
RBI may not raise CRR. The purpose of liquidity tightening to drive out speculation in currency market has been met with great extent, treasury executives said.
RBI may dwell on pre-conditions for reversing the steps in Q1 policy review and keep the tight leash on liquidity till end of quarter, Rao added.
The MMD document pointed out that the recent currency depreciation and upward revision in fuel prices have increased risks to both wholesale and consumer price inflation.
RBI’s document said going forward, business confidence remains subdued and the latest expectations surveys show a further fall in business sentiments.
Meanwhile, macro financial risks have amplified with global interest rate cycle starting to turn and causing capital outflows.
The moderation in global commodity prices and past monetary policy actions have lead to easing of the wholesale price inflation. But the consumer price inflation has hovered around double digit level in the last 15 months.
External sector stress has increased and rupee has depreciated significantly.
With recent liquidity tightening measures the Reserve Bank has curbed exchange rate volatility providing a temporary breather.
