INSUBCONTINENT EXCLUSIVE:
RBI will review lending rates on August 6 after its monetary policy committee meetingNursing an economy recovering after deadly second
Friday, and the markets will focus on what it says about normalising liquidity.To help the economy through the hard times caused by the
pandemic, the RBI has maintained excess rupee liquidity in the banking system with the daily surplus currently exceeding 6 trillion rupees
($80.78 billion).While most analysts reckon the RBI won't raise interest rates till next year, some expect the RBI to offer some clues as to
when it will start reducing liquidity in a commentary that is released after the monetary policy committee (MPC) meeting.All 61 economists
said with inflation likely to come off the recent highs above 6 per cent, RBI will continue to focus on growth and maintain its
accommodative monetary policy stance."We have already seen early signs of improvement in economic activity following the easing of some
restriction measures post the peaking of the second wave
However, these green shoots are still patchy at this stage," said Kunal Kundu, an economist with Societe Generale."With recovery not on
autopilot and a looming third wave of infection, growth needs to be carefully nurtured," he added.Opinions are split on when the RBI will
start withdrawing the massive rupee liquidity from the banking system which is widely seen as the first step in its policy normalisation
process.Societe Generale expects RBI to hint at normalisation on Friday given the worries on the inflation front but Barclays said it was
too early to send that signal.Barclays expects that RBI to raise interest rates and unwind the extraordinary liquidity support "reasonably
quickly" once it is confident that the economy's revival is firmly underway."The downside risks to the recovery and outlook for inflation
suggest to us that policy will remain very accommodative for several more meetings," said Shilan Shah, senior India economist at Capital
Economics.Mr Shah expects normalisation to be gradual after RBI Governor Das told a local newspaper last month that a sudden change to
monetary policy approach can have serious consequences for the economic recovery.Traders however are betting the RBI may hint at delaying
buying.Any revision to RBI's projections on growth and inflation will also be closely watched."Any RBI action on fine-tuning banking
system liquidity as well as any further steps towards ongoing 'orderly evolution of yield curve' will be the key determinants of interest
rates going forward," said Churchill Bhatt, executive vice president for debt investments at Kotak Mahindra Life Insurance.
