Tag: reverse repo rate

Maintaining status quo on rates will help further revive economy: Bankers

Banking & Finance

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The Reserve Bank of India’s decision to maintain the status quo on rates would help in a full-fledged economic revival but bankers and market participants are awaiting clear signals on liquidity normalisation.

Signs of recovery

Raj Kiran Rai G, Chairman, Indian Banks’ Association, and Managing Director and CEO, Union Bank, said, “Today’s policy is announced against the back drop of nascent signals of recovery of the domestic economy and mixed cues from the global economy.”

Also see: In a bid to lower power costs, Govt to implement Phase 1 of market-based economic despatch from April next

Since the price situation is under control for the time being, the central bank has given more focus on growth momentum in this policy also, he added.

Tapering excess liquidity

While the RBI has given a roadmap for tapering of excess liquidity from the system in a calibrated manner without disrupting government borrowing programme and liquidity needs of the economy, Rai said clear signals to the market will help the participants manage their liquidity needs well.

Accommodative stance

“The commitment to accommodative stance reaffirms the RBI’s commitment to support economic revival,” said AK Das, Managing Director and CEO, Bank of India.

Zarin Daruwala, Cluster CEO – India and South Asia Markets, Standard Chartered Bank, also said the MPC has reinforced its commitment to growth by continuing with its accommodative stance and holding the repo rate.

“The RBI’s latest economic forecast also points to a robust recovery amidst lower inflation,” she added.

Delayed normalisation

An SBI Ecowrap report said it expects that the normalisation of reverse repo and repo corridor may be possibly delayed beyond December.

Also see: Watch | RBI maintains status quo on rates

HSBC Global Research in a note said, “While the RBI kept rates and stance unchanged as expected, we think it took important steps to prepare the market for future policy normalisation.”

It expects the policy corridor to be narrowed over December and February, but repo rate hikes will only follow in the second half of 2022.

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RBI’s MPC starts deliberating on next monetary policy

Banking & Finance

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Reserve Bank of India Governor Shaktikanta Das-headed rate-setting panel MPC started its three-day deliberations on the next monetary policy on Monday amid a sudden surge in Covid-19 cases and the government’s recent mandate asking the central bank to keep retail inflation around 4 per cent.

The RBI will announce the resolution of the Monetary Policy Committee (MPC) on April 7.

Also read: RBI seen leaving repo rate unchanged in first review of FY22

Experts are of the view that the RBI will maintain status quo on policy rates at its first bi-monthly monetary policy review for the current fiscal. It is also likely to maintain an accommodative policy stance.

The policy repo rate or the short-term lending rate is currently at 4 per cent, and the reverse repo rate is 3.35 per cent.

Last month, the government had asked the RBI to maintain retail inflation at 4 per cent with a margin of 2 per cent on either side for another five-year period ending March 2026.

Also read: Govt’s borrowing plan to mount pressure on G-Sec yields in H1

M Govinda Rao, Chief Economic Advisor, Brickwork Ratings (BWR), said given the rise in the spread of coronavirus infections and the imposition of fresh restrictions to contain the virus spread in the major parts of the country, RBI is likely to continue with its accommodative monetary policy stance in the upcoming MPC meeting.

“Considering the elevated inflation levels, BWR expects the RBI MPC to adopt a cautious approach and hold the repo rate at 4 per cent,” Rao said.

Rao noted that in the last MPC, RBI initiated measures towards the rationalisation of excess liquidity from the system by announcing a phased hike in the cash reserve ratio (CRR) for restoration to 4 per cent.

“In the current scenario, the RBI may like to drain in excess liquidity, while higher borrowings and the frontloading of 60 per cent borrowings in H1 FY21 may put pressure on yields, and hence, the RBI may go slow in reversing its liquidity measures announced as a Covid-19 stimulus since March 2020,” Rao added.

Meanwhile, G Murlidhar, MD and CEO, Kotak Mahindra Life Insurance Company, said 2021 has seen a rise in yields across the globe in line with the vaccination-led optimism.

“However, the case for India is a little different this time, with a rapid rise in new Covid-19 cases over the last few weeks. In the upcoming policy, MPC may continue to emphasise the importance of ‘orderly evolution of the yield curve’ given benign inflation trajectory and second wave headwinds to nascent growth recovery,” said Murlidhar.

In a bid to control the price rise, the government in 2016 had given a mandate to RBI to keep retail inflation at 4 per cent, with a margin of 2 per cent on either side, for a five-year period ending March 31, 2021.

The central bank mainly factors in the retail inflation based on Consumer Price Index while arriving at its monetary policy. On February 5, after the last MPC meet, the central bank had kept the key interest rate (repo) unchanged citing inflationary concerns.

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How the MPC’s policy rates matter to you

Personal Finance

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Banker Balu’s long spell in front of the TV provoked his daughter Malathi into asking some questions.

Malathi: Dad, for God’s sake, stop watching that boring stuff and let me get to Netflix. How on earth is this speech on repo, Marginal Standing Facility, etc., useful to us!

Balu: Remember your savings account? Recall that fat education loan I took? The MPC’s decisions determine what rates you’ll earn on that deposit and what rates I’ll pay on your loan.

Malathi: Okay, if it’s about your money, I’m interested. What’s this repo and reverse repo rate thing which they’ve not changed?

Balu: The repo rate, short for repurchase rate, is the rate at which banks borrow quick money from the RBI, when they’re a little short of funds. The RBI keeps a special window called the liquidity adjustment facility (LAF) open for just this purpose.

Malathi: Don’t tell me banks run short of money and go broke!

Balu: He he! Sometimes they do, like one bank I won’t name. But we bankers often face temporary mismatches between our deposit inflows, repayments and loan outflows, which we try to plug with LAF. When we have extra money, we deposit it with the RBI at the reverse repo. Don’t you run to me to top up your account at month-ends?

Malathi: So, banks can simply walk up to the RBI and ask for money. Sounds lovely! Please open an LAF window for me, Daddy.

Balu: Sure, give me your smartphone as security. The RBI doesn’t hand out money to banks, it takes government bonds as collateral.

Malathi: Fat chance! The MPC just said that the repo rate is at 4 per cent. So, banks can borrow tonnes of money at 4 per cent and give us loans at 12 per cent? Now I know why you’re a banker.

Balu: The RBI allows banks to borrow from LAF upto a small fraction of their deposits, usually 0.25 per cent. If they need extra funds, they need to tap into the RBI’s Marginal Standing Facility, or MSF, at a higher rate.

Malathi: Why does this MPC tinker with the repo, MSF, etc? Can’t it just set them once and for all?

Balu: The MPC has to ensure that inflation doesn’t go out of control. So it regulates the price of the money – the interest rate.

When the price of money is high, there’s less of it chasing goods and services and presto, you have less inflation.

Malathi: But do repo changes affect our loans too?

Balu: Yes, your education loan is at 2 per cent over the banks’ lending rate, which is called MCLR. So, if the bank raises its MCLR, the loan becomes more expensive. But deposits will fetch me a little more, too, as my savings account rate is based on the repo rate.

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