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RBI may focus on easing fund flow and cut down rates

The Reserve Bank of India is unlikely to cut rates at its August 5, 2014 monetary policy announcement, but may prepare ground for an easier rate regime by introducing some liquidity measures. Meanwhile, indicators of an imminent revival in growth will take the pressure off the central bank as it focuses on its anti-inflation campaign.

Some financial institutions was unanimous that the repo rate, at which banks borrow funds from RBI, would be unchanged. But the central bank could announce steps that would see overnight rates moving to the 8% level, the same as the repo rate, leading to more stability. “Lower and less volatile overnight rates, coupled with lower liquidity shortfall, can help funnel funds into long-term infrastructure investments.

The central bank has been conducting 14-day term repo – through which banks borrow money for two weeks – only once or twice a month. This prompts banks to borrow aggressively and then end up with surplus funds later on in the cycle, leading them to start lending at lower rates, fuelling volatility in overnight rates. At the same time, the central bank is expected to retain its anti-inflationary stance while taking cognizance of crucial factors such as the monsoon and crude oil prices amid geopolitical situation.

 

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