“While the RBI has expectedly not changed the repo rate or stance this time, there has been a change in inflation outlook quite significantly. Interestingly the RBI has increased the forecast to 5.4% from 5.1% with the second quarter inflation crossing 6% (6.2%). This is indicative that for the present calendar year, there is no probability of a rate cut as inflation forecast for Q3 is placed at 5.7%.
The introduction of an incremental CRR, though on a temporary basis, will impound resources of banks and have an upward impact on market rates. While there will still be surpluses in the market, the concept of impounding of resources will exert upward pressure on sentiment and hence interest rates. We can assume that this will be reversed before the festival/busy season as the RBI could have gone in for OMO to permanently take out liquidity from the system.”
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