In a meeting on Friday, the Reserve Bank of India (RBI) will be coming up with key decisions of the Monetary Policy Committee (MPC). It happens to be the first monetary policy decision after the presentation of the Union Budget 2021 on February 1, 2021.
During her speech in the Parliament, while presenting the Budget, Finance Minister Nirmala Sitharaman had proposed to borrow Rs 12 trillion for the upcoming financial year and extra Rs 80,000 crore for the current fiscal year.
Owing to this, the bond market is expecting more clarity from the central bank of India on the proposed liquidity normalisation plan. It also has its eye on future bond purchases via open market operations (OMOs).
In January 2021, the RBI had stated that it will resume normal liquidity operations. It will do so by draining excess liquidity and bringing overnight lending rates an inch closer to the reverse repo rate. In layman’s terms, the reverse repo rate refers to a mechanism to absorb the liquidity in the market, which restricts the borrowing power of investors.
For the unknown, the daily liquidity surplus has been Rs 6-7 trillion over the last few months. Due to this, the short-term rates have been pushed below the reverse repo rate of 3.35 percent.
It should be noted here that high liquidity can push up inflation. However, the RBI’s inflation prediction is seen as higher than the actual. For Quarter 3, it was lower than expected, and now for Quarter 4, the Consumer Price Index (CPI) maybe 4.8 percent on the contrary to RBI’s forecast of 5.8 percent. Thus, this gives some headspace to help the government borrowing programme.
The sources suggest that the Reserve Bank of India (RBI) may not cut rates in 2021. The central bank of India is expected to retain the accommodative stance in 2021.
However, the liquidity language is something to watch out for. One more factor, to look out for is whether RBI will restore the Cash Reserve Ratio (CRR) to 4 percent from 3 percent on March 31. It is also a concern that whether higher liquidity would bother RBI’s inflation outlook or not.