RBI likely to leave the repo rate unchanged in August policy meet

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AS per the report of State Bank of India (SBI), the Reserve Bank of India (RBI) is likely to leave the repo rate unchanged in the upcoming policy review meeting. The report indicates that the Monetary Policy Committee (MPC) may look for unconventional policy measures for ensuring financial stability.

The Monetary Policy Committee (MPC) is scheduled for the meeting for three days beginning from 4th August and will announce its final decision on 6th August. RBI Governor is the head of the Monetary Policy Committee. The SBI research report– Ecowrap highlights that  in August the rate cut may unlikely and also believes that the MPC could now well debate what further unconventional policy measures could have resorted to the current circumstances for ensuring financial stability and it is continued to be addressed.

With the reduction of 115 basis points (bps) in repo rate at the beginning of February, 72 basis points have already transmitted by banks to the customers on fresh loans and some large banks have transmitted as much as 85 basis points. It has occurred because of the proactive RBI is using liquidity among others as a tool to serve its policies and objectives. For reducing the cost of funds and rigidity in the deposit structure of Indian banks that is, both the public sector and private sector have lowered their savings bank deposits rate, which is around 40 percent weight in the deposits basket.  This method helped the banks to reduce their one-year Marginal Cost of fund-based Lending Rate (MCLR) by 55 bps ranging from March 2020 to May 2020.

In the report, it is clearly mentioned that the people’s preferences of financial assets during the lockdown and in subsequent months will give a fillip to the financial savings in the country and they expect a jump in financial savings in FY21. Due to the nationwide lockdown, the supply side constraints led to a spike in CPI inflation to 7.2 percent in April, but in June it eased marginally to 6.1 percent, which means the real returns for savers have turned negative. In December 2019, it has turned negative to (-) 0.8 percent. The report which is prepared by SBI expects that the inflation will remain at elevated levels for the next few months so the real interest rate will continue to be in the negative zone. So, they believe in the current scenario and it will be appropriate for financial markets as a negative real rate is unlikely to hurt household financial savings given the uncertainty surrounding pandemic.

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