The minutes of the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) indicate that a majority of members are a little more convinced that growth is recovering fast though it may still need accommodative policy support and therefore, no rate hikes. Also, more members seem to be open to reverse repo hikes and a reduction in liquidity.

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In an interview to CNBC-TV18’s Latha Venkatesh, Ashima Goyal, External Member of MPC, said that RBI needs more tools to manage liquidity more efficiently.

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“India continues to attract large inflows and so even in the last policy we had spoken about how it is the RBI's call on what they do with liquidity. They can move towards reducing liquidity while the stance remains accommodative because the stance only determines what happens to the repo. So, they need more tools to manage this increased liquidity. One reason the reverse repo was cut was to induce banks to lend more since they earn less by parking idle funds, but banks have not really raised lending all that much. So, as the reverse repo rises, it could be linked towards increasing deposit rates so that they continue to have that inducement to earn more by giving loans that fetch them higher returns.”

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Shashanka Bhide, External Member of MPC, said reduction in surplus liquidity is imperative and must be done.

“Low rates of reverse repo were (meant) to encourage more credit and that issue still remains. The reverse repo rate issue is also linked to what is happening in the rest of the system. So, given that there is surplus liquidity, managing that liquidity is one of the concerns and reverse repo rate is one of the instruments to do that. So, this is conditional on what we expect to happen. So, reduction in surplus liquidity is certainly something that needs to be done.”

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Another External Member of MPC, Jayanth Varma, said that RBI needs to have a neutral stance on repo rate because risks are balanced for both inflation and growth.

“We are talking about moving towards normalisation. We need to get back to a position where we are sort of neutral even on the repo rate because increasingly the risks are becoming balanced, both on inflation and growth. There are significant risks to growth and there are significant risks to inflation as well. We need to be moving towards a neutral stance even on the repo.”

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