An ET poll of 12 market respondents showed that at the end of its October 4-6 meeting, the Monetary Policy Committee (MPC) is likely to keep the repo rate unchanged at 6.50% while retaining its stance of withdrawal of accommodation. Such an outcome would mark the fourth successive policy review in which the MPC has maintained a status quo on rates and stance.
Focus on protecting external sector
This has coincided with the dollar's climb as the Federal Reserve has sought to hold rates 'higher for longer', dimming the appeal of emerging market assets for global investors. Overseas funds turned net sellers in Indian equities for the first time this fiscal year in September even though the Nifty breached the 20,000 mark for the first time.
"At the same time, the US dollar has appreciated sharply due to favourable interest rate and growth differentials, keeping the INR on a weakening path," Rao said.
Higher oil prices pose upside risks to India's inflation and current account deficit while a depreciating rupee increases the threat of imported inflation. Such situations make a stronger case for the RBI to tilt toward tighter monetary conditions to help shield the external sector from volatility. India's consumer inflation was at 6.8% in August, down from 7.4% a month ago. The MPC's target for retail inflation is 4%, with a two-percentage-point tolerance threshold in either direction.
While analysts expect no action on rates, they believe the treatment of liquidity conditions in the banking system - a matter that falls outside the purview of the MPC - could become more important in the prevailing scenario. For the past couple of months, the central bank has harnessed liquidity management as an operational tool to guide money market rates in the face of inflationary pressures. In August, when India's inflation had shot up due to surging vegetable prices, the RBI announced an Incremental Cash Reserve Ratio (I-CRR) to reduce excess liquidity with banks, particularly in the aftermath of the recall of Rs 2,000 banknotes.
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