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RBI keeps policy rate on hold, keen to drain system’s excess cash

The Reserve Bank of India (RBI) kept its repo rate unchanged at 6.25 percent for a third consecutive policy meeting on Thursday as it continues to guard against any potential flare-up in inflation.

The RBI also announced a 25 basis point rise in the reverse repo rate to 6.00 percent, narrowing the gap between the repo and the reverse repo. That reduces volatility in short-term money market rates which track the difference between those two rates, as well as encourage banks to park their funds with RBI.

The narrowing of the corridor between the two rates is intended to stabilise money markets, and sets up the RBI to start withdrawing some of the big pile of cash that has accumulated in the banking system since last year.

All 60 economists polled by Reuters had predicted the RBI’s monetary policy committee would keep the repo rate at 6.25 percent, where it’s been since October.

The MPC’s vote was 6-0, just like the previous meetings, as the panel continues to exhibit a united front in its objective of keeping inflation at around 4 percent, with elbow room of 2 percentage points at either side.

The RBI, which unexpectedly changed its policy stance to “neutral” from “accommodative” at its last review in February, reasserted its concerns about inflation. This comes in spite of calls for the RBI to do more to aid an economy growing at less than the 8 percent needed to create full employment.

“The MPC remains committed to bringing headline inflation closer to 4.0 per cent on a durable basis and in a calibrated manner,” the RBI said in a statement.

“Accordingly, inflation developments have to be closely and continuously monitored, with food price pressures kept in check so that inflation expectations can be re-anchored.”

CONCERN ON FOOD PRICES

India’s benchmark 10-year bond yield rose 5 basis points to 6.74 percent after the decision, but the rupee strengthened to 64.84 from around 64.94 after the RBI kept rates on hold. The broader NSE share index erased an earlier loss of 0.3 percent.

The consumer inflation rate climbed to 3.65 percent in February from a year earlier, picking up from its lowest levels in at least five years.

The RBI is concerned that food prices could spike should India experience a below-average monsoon season this year. It is also monitoring core inflation, which has stubbornly stayed around 5 percent for several months.

As part of tackling inflation, the RBI pledged it would take steps to drain liquidity given cash in the banking system has soared to around 4 trillion rupees ($61.59 billion), doubling from January.

The surge came come after the government last year removed higher-value bank notes from circulation, leading to huge deposits of the banned bills.

In a separate document, the RBI said it would undertake measures such as additional treasury bill sales, outright open market operations bond sales, or a special facility that would allow the RBI to soak up the liquidity without collateral.

The RBI said it is “committed to reverting system liquidity to a position closer to neutrality, consistent with the stance of monetary policy.”

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