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Business News/ Economy / RBI says to continue to focus on inflation, liquidity in banking system
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RBI says to continue to focus on inflation, liquidity in banking system

RBI said inflation outlook was clouded by uncertainty following uneven kharif sowing and volatile global food and energy prices.

RBI governor Shaktikanta Das (PTI)Premium
RBI governor Shaktikanta Das (PTI)

Mumbai: The Reserve Bank of India on Friday said it will continue to focus on major risks posed by high inflation as well as the liquidity deficit in the banking system, while maintaining its status quo on key policy rates for the fourth time in a row.

The RBI's Monetary Policy Committee unanimously voted to keep repo rate unchanged at 6.5%. However, five out of six members voted to retain the policy stance as withdrawal of accommodation based on the rationale that transmission of the past rate hikes of 250 bps to bank lending and deposit rates is still incomplete.

The central bank said the inflation outlook was clouded by uncertainty following uneven kharif sowing and volatile global food and energy prices.

"We have identified high inflation as a major risk to macroeconomic stability and sustainable growth," said RBI governor Shaktikanta Das in his monetary policy speech. "Our monetary policy remains resolutely focused to aligning inflation to 4% target on a durable basis," he added.

The MPC kept both growth and inflation forecasts for the current fiscal at 6.5% and 5.4%, respectively.

Das also spoke about banks parking excess funds in the standing deposit facility, resulting in liquidity deficit in the banking system. The system saw a shortage of liquidity after RBI introduced the 10% incremental cash reserve ratio in the previous policy to withdraw excess liquidity that the system received post withdrawal of 2000 notes.

SDF is a collateral-free liquidity absorption mechanism implemented by the RBI with the intention of transferring liquidity out of the commercial banking sector and into the RBI.

Das encouraged banks to use this excess funds to lend in the overnight market instead of parking funds in SDF. He also said that RBI could look at doing open market operations to manage liquidity. RBI undertakes OMO purchase and sale of government securities to manage rupee liquidity.

"Moderation in system liquidity has led to greater recourse of MSF by banks. There is also skewed liquidity distribution among banks. It is a turning pitch and we will play our shots accordingly," said Das. "Going forward, RBI may have to look at open market sales of government securities to manage liquidity consistent with the stance of monetary policy," he added.

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Published: 06 Oct 2023, 10:59 AM IST
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