RBI Monetary Policy in nutshell

RBI governor Dr. Raghuram Rajan

RBI governor Dr. Raghuram Rajan

As expected, Reserve Bank of India (RBI) didn’t oblige with a rate cut. Fair enough. At least we at EfundsPlus didn’t expect it even.

Here is the policy document

In fact, we always wanted status quo maintained for a variety of reasons.

What RBI said:

•No rate cut this time

•Rate cut meaningless unless banks oblige too

•Only a 0.30% rate cut, RBI did 0.75%

•Monsoons are not bad; but inflation still need to be tracked

•Global economy weak, sentiment in China not encouraging

•“Bond market sell-offs originating in Germany lifted bond yields across the world, including in EMEs”

Table 1

Table 1

RBI’s action in nutshell

The market was contemplating no rate cut this time. So, RBI’s action doesn’t come as a surprise. However, there is something that needs consideration. Like What?

RBI says, Inflation is on a rise month-on-month and when this “base effect” of lower crude prices is over since October 2015. What does this mean? Inflation is on a gradual rise.

What’s story then?

Those pitching for rate cut based their argument on a weak basis. Why?

Rate cut is about cutting the overnight bank borrowing rates. At present, banks are hardly borrowing from the RBI overnight as they are already parked with surplus cash. Sp where was a need for rate cut? To make it more clear banks kept something around

Rs 76,000 crore were deposited with the RBI on 3rd August. It is the highest amount in the last two years. The reason is that it fetches banks interest earning of 7.24% with the RBI than crediting out in the market.

So, it was very high-fetched to ask RBI for a rate cut this time. However, Rajan has kept scope opened for the next time.

Photo courtesy: PTI/Capital Mind

Ashish Pandey

I am a business and finance journalist who is currently employed at Financial Express and previously at Zee News. My areas of interest include business and foreign policy. You can reach me on Twitter at @ashuvirgo1984 or @eFundsPlus.

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