Hike in reverse repo rate aimed at absorbing excess liquidity, say experts

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Published: April 6, 2017 6:04:29 PM

As widely expected, the Reserve Bank of India kept the repo rate unchanged at 6.25 per cent in its first monetary policy of this financial year today. However, it raised reverse repo rate to 6 per cent from 5.75 per cent, which is believed to be good news for banks as this rate is hiked mainly to enable excess liquidity in the system to get drained.

 

The RBI has kept the repo rate unchanged, but has hiked reserve repo rate which is very good for banks as they will get more money on deposits with the apex bank.

As widely expected, the Reserve Bank of India kept the repo rate unchanged at 6.25 per cent in its first monetary policy of this financial year today. However, it raised reverse repo rate to 6 per cent from 5.75 per cent, which is believed to be good news for banks as this rate is hiked mainly to enable excess liquidity in the system to get drained.

“The RBI has kept the repo rate unchanged, but has hiked reserve repo rate which is very good for banks as they will get more money on deposits with the apex bank. Also, CRR remains unchanged which is positive for real estate as banks can invest in REITs (Real Estate Investment Trusts),” said Ashish Kapur, CEO, Invest Shoppe India Ltd.

Adhil Shetty, CEO, Bankbazaar.com, said, “The increase in reverse repo rate means that banks now have an incentive to park their excess liquidity with the RBI and earn a higher rate of return. Additionally, the cash reserve ratio is unchanged. This is also good for banks and bonds – and good for investors who have bonds and banking sector stocks.”

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According to bankers, although there is no change in key policy rates, the LAF corridor has been narrowed with a hike in reverse repo rate and MSF rate to absorb the current liquidity overhang in the market. “While it might take next three or four quarters for the liquidity conditions to normalise, the Central Bank’s commitment to deploy all tools as needed to address the situation will alley market concerns,” said Andrew Gracias, Head-Financial Markets, RBL Bank.

As predicted by the market, the government’s main focus has been on controlling too much money floating in the system to curb inflation.

Rishi Mehra, CEO, Wishfin.com, said, “The RBI has increased reverse repo rate by 0.25 percent to flush out the excess cash in the system, by reducing the cash in hand of banks in a move to control inflation by flushing excess cash out. By absorbing the liquidity of the system, the RBI aims to control the inflation index. The volatility of crude oil prices and the lag in the passing of its benefits to the inflation are making it necessary to maintain liquidity and ultimately inflation which has become the primary goal of the apex bank.”

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Although the RBI kept the key policy rate unchanged, banks on their own have reduced lending rates, which will be a slight relief to the existing borrowers. Also, investors who rely a lot on bonds can breathe a shy of relief as there will be no change on rates due to the unchanged cash reverse ratio.

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