RBI moves to cut system's excess cash to help contain inflation

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The Reserve Bank of India surprised markets on Thursday by raising a secondary rate while holding the key rate steady, a move to help mop up liquidity and signal its worries about a potential spike in inflation.

As widely expected, the RBI kept the repo rate at 6.25 percent, where it's been since October. But it raised the reverse repo rate - what banks get for deposits at the RBI - by 25 basis points to 6 percent.

Narrowing the gap between those two rates reduces volatility in short-term money market rates which track the difference between them.

Importantly, it also encourages banks to increase their deposits at the RBI, setting up the RBI to start withdrawing some of the big cash pile accumulated in the banking system since Prime Minister Narendra Modi in November banned circulation of big currency-notes.

"With inflation set to accelerate further, we think that hikes to the repo rate will come onto the agenda much sooner than is generally anticipated," said Capital Economics.

For sure, inflation is central to future monetary policy.

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