RBI sees policy reversal over time

RBI sees policy reversal over time

Subbarao’s remarks, a day after RBI lifted policy rates by 25 basis points, sent bond yields slightly higher as investors anticipated tighter liquidity and further rate increases. The reverse repo rate, which is the rate at which banks lend to the RBI, marks the lower boundary of India’s interest rate corridor, with the repo rate as the higher rate. When liquidity is in surplus, market rates tend toward the lower end of the corridor, which is the reverse repo rate.

“We can’t assure reverse repo rate will be the operative rate. Ideally we will like the operative rate to be in the middle of the LAF (liquidity adjustment facility) corridor, but that’s difficult to maintain at that level,” Subbarao said. The average one-day call money rate on Wednesday was 3.79 per cent.

“We would ensure the call rate is within the LAF corridor but it is not clear that we will definitely maintain it at the reverse repo level,” Subbarao said. The call rate is the interbank overnight lending and borrowing rate. Further, Subbarao also said that resorting to open market operation for managing the government borrowing programme was the last option given expectations of robust capital inflows.

Meanwhile, RBI Deputy Governor Subir Gokarn said “we would like inflation to be at 3 per cent in the long-term and 4-4.5 per cent in the medium-term.” Food-driven inflation is now becoming more broad-based and is spilling over to other sectors and hence, RBI is now paying as much attention to headline inflation as to its components now, he said. Gokran, however, added he expects inflation to moderate going forward. “Depending on the monsoon, by August or so we should see a broad-based moderation in food prices,” he said.

He said the RBI projection of 5.5 per cent annual inflation for this fiscal is based on expectation of a normal monsoon and the resultant drop in food prices and also due to the RBI actions. “If we take both the patterns going to the end of the year, we expect moderation (in inflation),” Gokarn said, adding depending on the monsoon, RBI would take a call on the way inflation is heading.

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