Wednesday, January 30, 2008

RBI’s quarterly review of the monetary policy

The RBI Governor has kept the key rates unchanged in the recent review of the monetary policy. The key rates here include: Bank rate, CRR, Repo rate and Reverse repo rate. (Refer to the glossary or search our blogs for the definitions of these rates.)

Bank rate: 6%

Repo rate: 7.75%

Reverse repo rate: 6%

CRR: 7.5%

This has not gone down well with the expectations of the market, because everybody was expecting that RBI would reduce the rates in response to the US Federal reserve’s steep cut of the funds rate (the rate at which banks borrow/lend to each other). The Fed rate cut is seen as having sharpened the interest rate differentials between India and the US, leading to splendid arbitrate opportunity. This is expected to accentuate funds inflows into the country, leading to further rupee appreciation, subsequent sterilisation and the attendant fiscal costs.

But the RBI has stood its ground and the logic appears to be that there is no need for India to respond to US Fed’s actions at the moment. It felt there is no need for easing of our monetary policy in view of two factors:

  • There is adequate liquidity in our economy. The average reverse repo inflows are hovering around Rs. 13000 to 14,000 crores per day.
  • Global inflationary pressures have re-emerged.

For the moment, the RBI has found support from the FM also in its stand. But with the Fed rate cut bound to push more dollars into our economy, it is only a matter of time before it takes a hard look at our rates and possibly allow the appreciation of the rupee against the dollar.

Governor YV Reddy is known as a man of surprises. When the market expects him to act in a particular way, he never obliges it by acting in tune with its expectations.

So, my guess is that he will tinker with the rates sometime down the line but before the Annual Policy statement is presented in April. If he doesn’t do it, we can expect the rupee to strengthen against the dollar.

Am I venturing too far into the monetary expert’s domain? Yeah, I too have those doubts. But we lose nothing by being close watchers of the Governor’s moves.


SK said...

Ramky sir, i think u swapped the repo rate and reverse repo rates in the above article..plz..check it out.thanq

ramkyc said...

Yes SK, you are correct. I corrected it just now. Thanks for pointing it out.