India saw low holding rates, expected clues to liquidity normalization

MUMBAI, Aug. 3 (Reuters) – Fueling a recovering economy from the deadly second wave of coronavirus, India’s central bank is expected to leave interest rates at record highs for a seventh consecutive meeting on Friday, and markets will focus on what she says about liquidity normalization.

To help the economy weather the difficult times caused by the pandemic, the RBI has maintained excess rupee liquidity in the banking system, with the daily surplus currently exceeding 6 trillion rupees ($ 80.78 billion).

While most analysts believe the RBI will not raise interest rates until next year, some expect the RBI to offer clues as to when it will start cutting liquidity in a commentary. released after the Monetary Policy Committee (MPC) meeting.

The 61 economists polled by Reuters said they saw no change in the repo rate (INREPO = ECI) which has remained stable at 4% since May of last year. Read more

But the consensus was that the RBI would make two 25 basis point increases next fiscal year, raising the repo rate to 4.50% by the end of March 2023.

Economists have said that with inflation likely to emerge from recent highs above 6%, the RBI will continue to focus on growth and maintain its accommodative monetary policy. Read more

“We have already seen the first signs of improving economic activity following the easing of some restriction measures after the peak of the second wave. However, those green shoots are still patchy at this point,” Kunal said. Kundu, economist at Societe Generale.

“With recovery not on autopilot and a third wave of infection looming, growth needs to be carefully nurtured,” he added.

Opinions are divided on when the RBI will start withdrawing massive rupee liquidity from the banking system, which is widely seen as the first step in its policy normalization process.

Societe Generale expects the RBI to hint at normalization on Friday given concerns on the inflation front, but Barclays said it was too early to send that signal.

Barclays expects the RBI to raise interest rates and withdraw the extraordinary liquidity support “reasonably quickly” once it is satisfied that the economic recovery is well underway.

“The downside risks to the recovery and the outlook for inflation suggest that policy will remain very accommodative for several more meetings,” said Shilan Shah, senior Indian economist at Capital Economics.

Shah expects normalization to be gradual after RBI Governor Das told a local newspaper last month that a sudden change in approach to monetary policy can have serious consequences for economic recovery. Read more

Traders are betting, however, that the RBI could be hinting at a postponement of policy normalization due to the threat of a third wave and uncertainty as to when the US Federal Reserve will start cutting its bond purchases. .

Any revisions to the RBI’s projections for growth and inflation will also be closely watched.

“Any action by the RBI on fine-tuning the liquidity of the banking system as well as any other step towards an ongoing ‘orderly shift of the yield curve’ will be the main determinants of interest rates going forward,” he said. said Churchill Bhatt, executive vice president of debt investments at Kotak. Mahindra Life Insurance.

Reporting by Swati Bhat; Editing by Simon Cameron-Moore

Our Standards: Thomson Reuters Trust Principles.