The Reserve Bank of India’s (RBI) Monetary Policy Committee is likely to maintain the policy repo rate at 6.50% for the sixth consecutive meeting, according to economists. The focus will be on whether the committee considers altering the policy stance of ‘withdrawal of accommodation’ and measures taken by the central bank to address the liquidity deficit in the banking system.
Analysts expect the repo rate to remain unchanged at 6.50%. The Monetary Policy Committee has kept interest rates steady since April, following a 250 basis points increase in the repo rate from May 2022 to February 2023.
Despite inflation remaining above the central bank’s medium-term target of 4%, most market participants anticipate the committee to maintain the repo rate for several more meetings. Headline CPI inflation stood at 5.69% in December. RBI Governor Shaktikanta Das has noted that inflation is moderating and approaching the 4% target. Core inflation, excluding volatile food and fuel items, fell to 3.9% in December.
Food inflation a concern
The primary concern for the rate-setting panel is food inflation, which has remained elevated for the past six months, reaching a four-month high of 9.53% in December.
While the central bank has been actively managing liquidity through Variable Reverse Repo auctions, there are speculations that it could change its policy stance from ‘withdrawal of accommodation’ to ‘neutral’ to address the liquidity deficit. The RBI’s focus on managing liquidity comes as the liquidity deficit, which reached a record Rs 3.3 trillion in January, has since improved to Rs 1.4 trillion due to government month-end spending.
Easing liquidity
Since December 15, the RBI has proactively supported liquidity through 11 variable rate repo auctions of varying tenures. However, the majority view suggests that the central bank will continue its current liquidity operations, involving variable rate repo auctions and variable rate reverse repo tenders. While durable liquidity easing measures may not be expected as long as the monetary policy stance remains in ‘withdrawal of accommodation’ mode, the RBI is likely to continue measures to address frictional tightness in liquidity for fine-tuning operations.
