The Reserve Bank of India (RBI) headquarters in Mumbai. (AFP File)
The RBI may not cut rates in 2021. It is expected to retain the accommodative stance in 2021.
The Reserve Bank of India (RBI) will be coming up with key decisions of the monetary policy committee (MPC) meet on Friday. This will be the first monetary policy decision after the Union Budget was presented on Monday.
Finance minister Nirmala Sitharaman in the Union Budget 2021 had proposed to borrow Rs 12 trillion for the next fiscal and an extra Rs 80,000 crore this fiscal.
The bond market, therefore, expects more clarity from RBI on the proposed liquidity normalisation plan and also future bond purchases via open market operations (OMOs).
Last month, the RBI had said it would resume normal liquidity operations by draining excess liquidity and bringing overnight lending rates closer to the reverse repo rate. The daily liquidity surplus has been Rs 6-7 trillion over the last few months. This has driven the short-term rates below the reverse repo rate of 3.35%.
High liquidity can push up inflation. However, RBI’s inflation forecast is seen higher than actuals. For Q3, it was lower than expected and for Q4, CPI may be 4.8 percent versus RBI’s forecast of 5.8 percent. So, this gives some elbow room to help the government borrowing programme.
The RBI may not cut rates in 2021. It is expected to retain the accommodative stance in 2021. However, the liquidity language is important. Another factor to look out for is whether RBI will restore CRR to 4 percent from 3 percent on March 31 and whether higher liquidity would bother RBI’s inflation outlook.