MPC Keeps Key Policy Rates Unchanged: Expert Views On Liquidity Adjustment Facility

On 8 December, the Reserve Bank of India (RBI) held its fifth consecutive meeting to discuss the country's key interest rate. The RBI's monetary policy committee (MPC) decided to keep the repo rate, which is the rate at which banks borrow short-term funds from the central bank, at 6.5 per cent.

This decision was expected, as the MPC has kept the repo rate unchanged at 6.5 per cent for the past four monetary policy reviews. The central bank cited a potential resurgence in inflation and emphasized that price stability remained its primary objective. Prices currently remain higher than the central bank's medium-term target of 4 per cent.

“The decision of status quo on Policy Rates and stance by MPC is as per our expectations and a welcome move. MPCs emphasis on keeping the Inflation target at 4 per cent in the long run demonstrates RBI’s commitment to support sustainable growth while maintaining financial stability,” said Sanjay Agarwal, Founder, MD & CEO, AU Small Finance Bank.

He further added that despite global headwinds, RBI has raised the GDP forecast to 7 per cent from 6.5 per cent for the financial year 2024(FY24) demonstrating confidence in domestic growth levers.

RBI Governor Shaktikanta Das announced that the MPC had voted unanimously to leave the repo rate unchanged at 6.5 per cent. Additionally, the Standing Deposit Facility(SDF) and Marginal Standing Facility(MSF) rates were left unchanged at 6.25 per cent and 6.75 per cent, respectively. The RBI had previously raised the repo rate by 250 basis points since May 2022.

Karthik Srinivasan, Senior Vice President, Group Head - Financial Sector Ratings, Icra said, “Given the 24X7 fund transfer facility available for customers, the banks face challenges on liquidity management over the weekend, when inter-bank markets are closed. Hence, as a matter of prudence they end up borrowing three-day funds in the inter-bank market and MSF window over the weekend.”

He further mentioned that similarly, banks with surplus liquidity end up locking the funds for three days under SDF over the weekend, with the proposal to reverse these three days' MSF and SDF facility, we expect the volatility in call money rates to reduce and the extent of balances used in MSF and SDF facilities over the weekend to also moderate.

“However, given the overall tight liquidity in the banking system, we do not expect the call money rates to decline substantially. This will also lead to marginal savings in interest costs for banks who end up borrowing and depositing in MSF and SDF respectively over the weekend,” he further added.

RBI Governor Shaktikant Das also mentioned that MPC has also voted, by 5 votes to 1, to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

“As of now, the RBI anticipates that liquidity conditions will remain stable. The policy was, on the whole, less hawkish than had been anticipated. Simultaneously, the governor issues specific warnings regarding premature adjustments to monetary policy rates and liquidity stance, which indicate that the rate pause and liquidity withdrawal stance may persist for a longer duration than initially expected,” said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers.

He further added, “We maintain our assessment that no rate reductions would occur until the latter part of fiscal year FY25. An upward adjustment to the GDP forecast would have a favourable effect on market sentiment.”