RBI panel starts meet on interest rate; announcement on Friday

Mumbai: RBI Governor Sanjay Malhotra-headed six-member rate-setting panel on Wednesday started deliberations on the next set of bi-monthly interest rates in the backdrop of growth-focused Union Budget and announcement of India-US trade deal, which lifted market sentiments.

The decision of the Monetary Policy Committee (MPC) will be announced by Malhotra on Friday morning.

Experts are of the view that the RBI has already reduced the key short-term lending rate (repo) by 125 basis points since last February, and may go for status quo on rates, as there are no pressing concerns on either growth or inflation fronts.

However, some are of the opinion that the central bank may go for one more rate cut to further reduce borrowing costs.

A SBI research report said that since the last MPC in December, one of the major policy changes is the EU-India and US-India trade deals, resulting in a reduction in tariffs on India to 18 per cent from 50 per cent earlier.

Clearly, India now has one of the lowest tariffs among Asian countries, which will help in improving our export competitiveness, it said.

“We observe that despite policy rate easing, government bond yields have exhibited persistent hardening in recent periods. We believe that the choice of eligible securities itself may influence the effectiveness of OMO operations, even when the aggregate quantum of liquidity injection is unchanged,” it said.

The RBI is thus likely to maintain the status quo in the upcoming policy, the SBI study said.

A BofA Global Research note said the RBI’s rate-cutting cycle appears to be over for now. The trade deal now would boost the growth certainty, and the current momentum seen in high-frequency indicators can continue to sustain, it said.

“We also believe the RBI is now done cutting rates but will continue to manage its liquidity provisions carefully to ensure rate transmission remains active,” the note said.

On expectations from MPC, Deepak Agrawal, CIO - Debt, Kotak Mahindra AMC, opined that the RBI’s upcoming policy, coming soon after the Union Budget, is set against a supportive domestic macro backdrop.

“With inflation well below the target, growth momentum intact, surplus system liquidity, and fiscal consolidation reaffirmed, conditions favour policy stability. While global uncertainties remain, India’s relatively strong growth dynamics, improving external position, and record foreign exchange reserves provide the MPC with ample comfort to stay on pause,” Agrawal said.

Additionally, tariff reduction by the US, EU-India FTA deal would ease pressure on the rupee, giving the RBI enough room to release adequate durable liquidity to keep system surplus on a durable basis -- something that had been constrained in the recent past.