MPC meets to review monetary policy amidst rate cut hopes

The six-member Monetary Policy Committee (MPC) began its 2-day deliberations on Tuesday, amidst hints that the Reserve Bank Governor will announce a 0.25 per cent reduction in interest rates.

Banks, flush with cash from the deposits of old demonetised Rs500 and Rs1,000 notes, have already reduced deposit rates and a further push by the central bank could pull down rates further.

The first monetary policy review after demonetisation of old Rs500 and Rs1,000 currency notes follows a surge in bank deposits. A reduction in interest rate is expected to cushion the impact of demonetisation that pulled out 86 per cent of the money in circulation.

This is the second meeting of the MPC after Urjit Patel took over as RBI governor after the first one in October, when it had cut the repo rate or short term lending rate by 0.25 per cent to 6.25 per cent.

RBI has reduced repo rate by 1.75 per cent since January 2015.

Bankers opined that with the increase in Market Stabilisation Scheme (MSS) ceiling to Rs6,00,000 crore from Rs30,000 crore, RBI is unlikely to continue to apply the incremental cash reserve ratio.

In order to manage liquidity conditions, RBI had, on 28 November, asked banks to maintain an incremental CRR of 100 per cent on deposits accrued between 16 September and 11 November 2016.