It’s the first Mid-quarter Review of Monetary Policy. The repo and reverse repo rates were increased 25 bps and 50 bps respectively. The CRR was left untouched.
The reverse repo rate increase of 50 bps means banks will earn more on funds lodged with the RBI in the daily Liquidity Adjustment Facility (LAF), which happens when they have liquidity in excess of their credit and investment needs.
Current money rates are pretty close to the repo rate (the rate at which banks borrow from the RBI). So the central bank saw no reason to change the CRR. Over the last two to three years, it has managed to whip money rates into line through active CRR management, adding or withdrawing liquidity as necessary. This means the CRR (or other monetary tools such as MSS bonds) will be the primary vehicle used to drive money rates towards policy rates. For this, the RBI probably prefers a slightly liquidity-short market. Its repo rate then becomes meaningful as borrowing banks must build that cost into their credit and investment decisions.
The RBI takes (cold?) comfort in the steadying of inflation but concedes it’s still ‘elevated’. The hope is, as is the ‘official’ stance these days, that food prices will fall significantly in the coming months, if, as expected, the excellent rains yield excellent harvests and increased supplies and comfortable stocks. But price behaviour, as the experience of the recent past shows, is far from a given.
The fact is that the serial rate increases have had little impact on consumer and business sentiment, at least on those segments of the economy that are supposed to respond to these things. Business has passed on cost increases and more. Asset markets are buoyant. Growth is in the region of double digits.
If one were to point a gun at the heads of policymakers, they are likely to admit they are reasonably comfortable with the current state of affairs. Inflation, though ‘elevated’,’ is not alarming. What’s worrisome is only the risk of an ‘inflation psychology’ taking hold. The central bank’s job is to make threatening noises and growl all the time to keep the ‘inflation vigilantes’ at bay.
Not that the RBI looks particularly frightening at the moment. It says further rate increases will depend on ‘macroeconomic conditions’.
The earth shaking statement in the policy was that the process of rate ‘normalisation’ is almost over.
That, indeed, is the key message of the Mid-quarter Review.
