Expect policy rates to stay put

The Reserve Bank of India is expected to leave policy rates (repo rate and reverse repo rate) and cash reserve ratio unchanged on tight liquidity concerns and easing inflation in the mid-quarter review of monetary policy on Thursday.

The Reserve Bank of India is expected to leave policy rates (repo rate and reverse repo rate) and cash reserve ratio unchanged on tight liquidity concerns and easing inflation in the mid-quarter review of monetary policy on Thursday.

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If so, this would be the first meeting since January that the RBI leaves policy rates untouched.

“There are no compelling reasons for RBI to increase policy rates as liquidity is tight in the system and inflation has come down and is expected to fall further,” says Abheek Barua, chief economist, HDFC Bank. He says the petrol price hike will not have significant impact on inflation.

However, Rupa Rege Nitsure, chief economist, Bank of Baroda expects hike in repo rate (the rate at which banks borrow from RBI) and reverse repo rates (the rate at which the RBI borrows from the banks). “I expect RBI to increase repo and reverse repo rate by 25 basis points,” she said.

RBI will hike rates mainly to address inflation that, according to her, is expected to rise due to likely increase in diesel prices in near future.

Inflation, as measured by the wholesale price index, eased in line with expectations to its lowest level in a year in November. It rose 7.48% in November compared with 8.58 % in October.

Liquidity has been tight since November, with banks borrowing an average of around R1 trillion from RBI each day.