By Swati Bhat
MUMBAI (Reuters) - The Reserve Bank of India monetary policy committee is expected to leave interest rates unchanged when it meets on Friday, after data showing the economy contracting less than expected and persistently high inflation.
Economists and market participants are closely watching the commentary from the RBI around liquidity. The overnight call money rate has fallen below the reverse repo rate on days on account of the excess liquidity in the banking system.
"The MPC's views on liquidity will assume more importance, as the transient surplus has pushed down short-term/overnight rates sharply," said Radhika Rao, an economist with DBS Bank.
Economists expect the RBI to announce measures to help tweak market rates through liquidity absorbtion operations or giving increased access to the reverse repo window to more market participants.
All 53 analysts and economists in Reuters poll conducted ahead of the GDP data released last week said they don't expect any change in rates on Friday.
Economists also pushed back the expected timing for the next rate cut by a quarter after the RBI having cut its key interest rate by a total 115 bps this year to a record low of 4%.
The poll showed economists now expect the next rate cut to be in the Apr-June quarter, as against the Jan-March period they had predicted in the previous two surveys.
Inflation has remained consistently above the upper end of RBI's mandated 2%-6% target range every month barring March this year while core inflation has also remained sticky.
On the other hand in the September quarter gross domestic product contracted 7.5% on year compared to a decline of 23.9% in the previous three months, when the impact of the coronavirus pandemic was more pronounced.
RBI governor Shaktikanta Das last week said the economy was showing stronger than expected pick-up in recovery but one needs to be watchful of the sustainability of demand after a series of religious festivals.
(Reporting by Swati Bhat; Editing by Simon Cameron-Moore)