Wednesday, April 6, 2016

Monetary policy reaction - IIM Kozhikode

Prof Rudra Sensarma, Associate Professor of Economics, IIM Kozhikode
“Commentators have frequently argued that the problem in India is not so much with high interest rates as with persistent liquidity deficit in the banking system. In the first bi-monthly monetary policy announcement of FY17, the RBI governor has delivered on both the rate as well as liquidity fronts. The 25 bps cut in the repo rate and the 75 bps cut in the MSF rate will make it cheaper for banks to borrow from the central bank and transmit the lower rates to their borrowers. The RBI has narrowed the LAF corridor from 200 bps to 100 bps in line with advanced economies. It is a sign of greater confidence of the RBI in influencing the call rate. This will help liquidity management of banks by freeing up their liquidity buffers. The daily CRR maintenance requirement has been cut from 95% to 90% which will also ease liquidity. The MCLR system effective from 1st April and the lower SLR from 2nd April will also bring rates down and free up resources for lending. With accommodative monetary policy, normal monsoon and the recent budget’s focus on the rural sector, the economy is expected to chug full steam ahead in FY17.”

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