Set in the backdrop of heightened global instability, sharp rupee depreciation, persisting inflation and significant growth risks, the quarterly policy review has announced a further 25 bp hike in policy rates while signalling a possible end to future hikes depending on evolving macroeconomic condition.
Policy Stance
The policy stance in the review aims to anchor inflationary expectation, stimulate investment activity, reinforce emerging downward inflationary trajectory and ensure liquidity is in moderate deficit.
Effects of the policy
The rate hike of 25 bps was largely expected and discounted in the market. The tone of the RBI policy is dovish, thereby indicating that the rate hike cycle has almost touched the peak.
The short term money market rates and bank deposit rates are expected to remain at the present level, while banks may be constrained to increase their base rates immediately on account of the repo rate hike as well as deregulation of savings bank interest. The sovereign debt yields are expected to have a soft bias.
Base rate
Transparent and non-discriminatory pricing of credit is long overdue. Bigger corporates have been bargaining for finer rates although the credit risk could be higher, whereas the smaller borrowers with lower credit risk could be paying a higher rate of interest.
The Base Rate has not addressed this issue and, therefore, this is a welcome step to have a working group look into these aspects.
(The author is CMD, Indian Overseas Bank.)