RBI opens door for rate cut, finally

If we see higher inflation in Sep-Oct and 7% GDP growth in Sep qtr, will the RBI go for a rate cut in Dec? Or, will that be pushed to Feb?

- TAMAL BANDYOPADHYAY

Once again, the Indian central bank has maintained status quo at the October meeting of its rate-setting body when it comes to the policy but opened the door for a rate cut in future.

The newly constituted Monetary Policy Committee (MPC) has kept the repo rate, or the rate at which the central bank lends money to commercial banks, unchanged at 6.5 per cent but it has changed the stance from "with-drawal of accom-modation" to "neutral". Five out of six members of the MPC have voted for the status quo on rate; the decision on change in stance is unanimous.

One can argue that the change in stance is a formality as the Reserve Bank of India (RBI) has all along taken care that there is adequate liquidity in the system. For instance, the liquidity in the system was in surplus in August-September and early October, and when it had turned into deficit for a brief period in the second half of September, the RBI infused money into the system. But the change in stance signals the change in the direction of the central bank's approach to the policy.

After the change in stance, the RBI has committed to continue to be nimble and flexible in its liquidity management operations. “We will deploy an appropriate mix of instruments to modulate both fric-tional and durable liquidity so as to ensure that money market interest rates evolve in an orderly manner," the governor's statement says.

The government bond market welcomed the policy with a mini rally. The 10-year bond yield dropped to 6.73 per cent before sur-rendering some of its gains and closing at 6.7675 per cent.