Reserve Bank of India sees holding rates record low

Nursing an economy recovering after deadly second coronavirus wave, the Reserve Bank of India (RBI) is expected to leave interest rates at record lows for a seventh straight meeting on Friday, and the markets will focus on what it says about normalising liquidity.

To help the economy through the hard 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 reckon the RBI won’t raise interest rates till next year, some expect the RBI to offer some clues as to when it will start reducing liquidity in a commentary that is released after the monetary policy committee (MPC) meeting. All 61 economists polled by Reuters said they see no change in the repo rate which has been steady at 4 per cent since May last year.

But the consensus expected the RBI to make two 25 basis point increases next fiscal year, taking the repo rate to 4.50 per cent by end-March 2023.

Economists said with inflation likely to come off the recent highs above 6 per cent, RBI will continue to focus on growth and maintain its accommodative monetary policy stance.

“We have already seen early signs of improvement in economic activity following the easing of some restriction measures post the peaking of the

second wave. However, these green shoots are still patchy at this stage,” said Kunal Kundu, an economist with Societe Generale.

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

Opinions are split on when the RBI will start withdrawing the massive rupee liquidity from the banking system.