Negative rates as conscious policy – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-view/et-view-negative-rates-as-conscious-policy/articleshow/79561743.cmsSynopsis

The RBI’s policies on maintaining high liquidity to fuel recovery, keeping a Targeted Long Term Repo window open is most sensible. It is unlikely to be used much, though, considering the oodles of liquidity being created by the RBI’s attempt to keep the exchange rate reasonably stable, even as foreign capital floods in, as confidence returns to mature markets.

The RBI has held nominal rates steady, even as it expects inflation to go up, meaning that it has effected a cut in real interest rates. A repo rate (the rate at which the central bank will lend to banks) of 4% while the inflation rate is expected to be 6.8% and 5.8% in the ongoing Third Quarter and in the Fourth Quarter respectively means India will join Europe and Japan in having negative policy rates.

It is welcome that the RBI continues to maintain an accommodative stance, making sure that companies will not be constrained by lack of access to credit when they need it to accelerate the pace of economic activity. The RBI’s expectation that growth decline in the current fiscal year would be limited to 7.5% seems realistic. It means that the economy would regain the size it had attained in 2019-20, by the end of 2021-11, if it registers a growth rate of 8.1% next fiscal.

The RBI’s policies on maintaining high liquidity to fuel recovery, keeping a Targeted Long Term Repo window open is most sensible. It is unlikely to be used much, though, considering the oodles of liquidity being created by the RBI’s attempt to keep the exchange rate reasonably stable, even as foreign capital floods in, as confidence returns to mature markets, in the wake of Donald Impetuous Trump’s exit and the announcement of vaccine trial success. The RBI is not sterilising the rupee created when it buys up dollars using the normal practice of selling bonds that would mop up the liquidity. Instead, it is keeping its reverse repo window open to absorb the liquidity, giving the initiative to the banks on utilising the additional liquidity at their disposal to lend or to park it with the RBI.

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