MPC Maintains Status Quo On Rates But Sucks Out Liquidity
By A Special Correspondent
First publised on 2023-08-10 10:20:34
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As expected, the MPC of RBI has kept key policy rates unchanged in its August meeting while maintaining a hawkish stance. The repo rate remains at 6.5%. The standing deposit facility rate remains unchanged at 6.25% and the marginal standing facility rate and the Bank Rate at 6.75%. RBI governor Shaktikanta Das said that the decision was unanimous. The growth rate projection for this fiscal was also unchanged at 6.5%. While acknowledging that the global economy was facing tough challenges of inflation, geo political uncertainty and extreme weather conditions, Das said that the "Indian economy is exuding enhanced strength and stability" and was poised to "benefit from ongoing transformational shift in global economy".
In order to flush out excess cash (mainly due to the return of Rs 2000 currency notes to the banking system), the RBI unexpectedly decided to raise the incremental cash reserve ratio (ICCR) to 10% on the incremental NDTL (net demand and time liabilities) over the last three months. This move is expected to squeeze out Rs 1 lakh crore from the banking system. Das stressed that this move will not impact credit needs of productive sectors.
Das reiterated that "the job on inflation is not done". He added that "inflationary risks persist amidst volatile international food and energy prices, lingering geo political tensions and weather-related uncertainties." The RBI upwardly revised its inflation projection for FY24 from 5.1% to 5.4%.
While it was widely expected that the MPC will not change
key rates, the move to suck out liquidity from the system has surprised the
experts. But as the RBI has said, the fight against inflation is not over yet. This
means that any rate cut is unlikely in the near future. This also means that the
RBI is likely to follow tight money policy and not let excess liquidity float
in the market.
