The Reserve Bank of India (RBI) on Tuesday hiked its benchmark policy rates, repo or the rate at which it infuses short-term liquidity into the system and reverse repo or the rate at which it allows the banks to park their surplus funds with it by 25 bps. The move was widely expected and to a large extent factored in by most markets and should be seen as a positive.
The Indian monetary authority also raised the Cash Reserve Ratio (CRR), the percentage of time and demand liabilities that commercial banks are required to park with the central bank, by 25 bps. The move will suck around Rs 12,000 crore from the system compared with idle liquidity of around Rs 40,000 –Rs 45,000 present in the system currently.
The 25 bps move across the board was largely expected and is unlikely to push market rates sharply in near term. However, given that the rate hike is very mild, another mid-cycle move by the RBI before the next scheduled quarterly review is certainly on the cards.
One reason why the RBI has taken a middle path and not hiked any of the rates by say 50 bps is that outlook of monsoon, a crucial factor in Indian economy, is not yet completely clear. As such, the RBI has kept some space with it and as and when the monsoon outlook becomes clear, the central bank can be expected to go in for another mid-cycle move.
