RBI policy: Liquidity management in focus

Mumbai: The RBI is likely to maintain accommodative stance in its annual monetary policy review Tomorrow. However, there are lots of other important issues that are likely to be addressed during the meeting, one of them being liquidity management. Given the core liquidity surplus is persisting close to Rs 12 trillion, the RBI may provide a roadmap on liquidity management. Meanwhile, the Monetary Policy Committee (MPC) kick started its three-day review meeting on Wednesday. The Meeting will be concluded Tomorrow.

The monetary policy meetings seem to have reached a stage where decisions from the RBI will be more keenly watched than what the MPC delivers. In the October meeting, the markets will be watching for RBI's signals on addressing the liquidity glut along with the normalization of reverse repo rates. The MPC will likely continue to stick with the accommodative stance, for now, while keeping the repo rate unchanged, say experts.

Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities, says, "With a mixed bag in terms of both growth and inflation outlook, the RBI and MPC will want to wait for a clearer picture. But as the economy recovers, and given the financial stability perspective, it is also essential to gradually withdraw the excess liquidity and reverse an ultra-low interest rate regime with likely incipient asset price dislocations."

The upcoming policy will be watched for the RBI's stance on liquidity management. While the RBI may not shock the system with a reverse repo hike, the policy will be used as a lever to prepare markets for a gradualist approach toward normalization through both communication and action. Markets will still be assuaged that no premature tightening of financial conditions will happen and the uptick in yields will be managed.