Interest rates are headed higher despite RBI's stance

Interest rates, RBI, Fed, Interest rate hikes, Rate hikes, US Fed, Reserve Bank of India

Unchanged policy rate and sustenance of the accommodative stance in the Reserve Bank of India (RBI)’s statement today was on expected lines. However, a broader assessment of growth outlook and inflation was on the neutral side as against expectations of reciprocal responses to the gaining hawkish context for global monetary policy normalisation. Specifically, the market was expecting greater acknowledgment of a quicker tapering by the US Federal Reserve and gaining acceptance of an early rate lift-off in 1H2022.

RBI responded with a fairly calibrated strategy that is pivoted on certain key assumptions:

  • While India’s recovery is gaining traction, the path is far away from attaining the pre-Covid real GDP trajectory. Even with the projected 9.5 per cent growth in FY22 and 12.5 per cent in 1HFY22 — which are largely a statistical bounce after the Covid shock — the slack in the economy, particularly on the private consumption side, will still be substantial, thus requiring an accommodative monetary policy.
  • The RBI believes that the buffer against the spillover effects of faster monetary policy normalisation in the US is adequate with forex reserves at $638 billion, which can be used to ensure financial market stability and growth supportive liquidity conditions.
  • With the focus remaining on headline inflation, which is targeted to remain around 4.5-5 per cent, while underplaying the significance of core inflation, the RBI believes that a well-anchored inflation regime should act as a bulwark against a potential decline in external capital flows.

Based on these assumptions, the RBI’s base case strategy is to sustain a calibrated and non-disruptive normalisation programme, which extends the earlier liquidity neutralisation measures. Hence, the earlier measures of discontinuance of GSAP purchases and expansion of Variable Rate Repo auctions for a longer duration have been enhanced with even larger 14-day VRRR actions of Rs 6.5 trillion (December 17) and Rs 7.5 trillion (December 31). Such actions will continue after December 2021 and will enable the RBI to pace the liquidity supply in line with its normalisation strategy.

In addition to the expansion of the VRRR limits and auctions, other measures towards liquidity normalisation include a) prepayment of liquidity support taken by banks under the LTRO and TLTRO windows initiated in the wake of the Covid shock (RBI says that out of the total borrowing of Rs 1.13 trillion, banks have already returned Rs 373 billion); b) termination of on-tap liquidity facility to the healthcare sector (Rs 650 billion) from March 31, 2022; and c) rolling back the expanded MSF borrowing limits of banks from 3 per cent to 2 per cent of net demand and time liabilities.

In our view, despite the near-neutral tone of articulation, it is clear that the RBI is increasingly moving towards liquidity normalisation, which will continue to imply further hardening of short-term rates. The expected tightening in liquidity due to gains in credit growth by year-end (our assumption of 8 per cent in March 2022 vs 7 per cent now), deceleration of deposit growth (8.7 per cent, 9.8 per cent now), and declining foreign currency assets are likely to move up the long-end G-sec curve as well.

In addition, as the RBI uses the forex reserve buffer to defend the exchange rate, in response to faster QE tapering and eventual rate lift-off, potentially in 2Q 2022, the liquidity normalisation will likely hasten.

Thus, we reaffirm our view that the interest rates in India are headed higher even as the RBI lags in initiating policy rate hikes, which will imply quicker repricing of term deposit rates of banks and finance companies.

Also, the RBI’s statement affirms our view that the private capex cycle is a desirable thing but it is still far away, given the extant large slack in private consumption and the enduring negative output gap. The lack of private capex has been a significant drag on the ability of Indian banks to leverage their overcapitalised balance sheet.

Lastly, while the outlook on headline inflation remains benign (projected at 5.7 per cent in 4QFY22 and 5 per cent in 1HFY23), core inflation has averaged 6 per cent in recent months. Likewise, the current account balance has quickly turned into a deficit (-2.8 per cent of GDP in Q2FY22) after a very short period of surplus of 1.4 per cent in 1HFY21, immediately after the pandemic shock. Persistently high core inflation, above 4 per cent (it was elevated even before the pandemic), and quick emergence of CAD, even while the economy is judged to be substantially below potential, is a concerning combination. This hints at a further decline in the potential GDP trajectory from the lows of 4.5-5 per cent prior to Covid.

Hence, while the RBI is expecting lower core inflation in anticipation of lower taxes on fuel, gains in consumption demand can induce an upside risk to inflation and widen CAD/GDP even further, if indeed the potential GDP is indeed on a slower track compared with the pre-Covid trajectory. Hence, our base case is that the RBI will also initiate rate hikes soon after Fed’s lift-off in 2QFY22.

News Related

OTHER NEWS

Leopard that attacked seven people in Tamil Nadu captured by forest officials

Tiruppur leopard A leopard that attacked and injured seven people, including two farmers in Tamil Nadu’s Tiruppur was captured by forest department officials on Thursday. The big cat entered the ... Read more »

Uttarakhand Assembly: CM Pushkar Singh Dhami files nomination from Khatima

© Provided by Zee News Uttarakhand Chief Minister Pushkar Singh Dhami filed his nominations on Thursday from the Khatima Assembly seat for the February 14 polls. Dhami offered prayers at ... Read more »

‘Will BJP demand President's resignation?' Shiv Sena asks BJP amid row over renaming sports complex after Tipu Sultan

© Provided by The Financial Express Sanjay Raut further said that the BJP can keep trying to change the history while sitting in Delhi. (PTI) The ruling Shiv Sena in ... Read more »

Chandigarh partially reopens schools; gyms and markets allowed to stay open till 10 pm

Amid a drop in the number of daily and actives cases of Covid-19, the Chandigarh administration on Thursday announced relaxation in pandemic-linked restrictions. The UT administration has decided to reopen ... Read more »

Activists seek ban on caging of wild birds in Odisha

© Provided by The Statesman Activists seek ban on caging of wild birds in Odisha Activists have called for a blanket ban on the pernicious practice of keeping wild avian ... Read more »

Govt mulls model for staggered opening of schools following all COVID protocols

The union government is working on a model for staggered opening of schools for physical classes following all COVID-19 related protocols, sources said on Thursday. Schools have been closed in ... Read more »

Dow profit more than doubles on higher prices

FILE PHOTO: The Dow logo is seen on a building in downtown Midland, Michigan (Reuters) – Dow Inc's fourth-quarter profit more than doubled on Thursday, helped by higher prices for ... Read more »

S. Korea expert defends use of rapid tests as omicron surges

The Associated PressPeople wearing face masks walk on the street near the Pyongyang railway station in Pyongyang, North Korea, Thursday, Jan. 27, 2022. The red banner says, “Implementation of decisions ... Read more »

Ukraine crisis: Russia “not optimistic” but will keep talking with west – live coverage

© Photograph: Stanislav Kozliuk/EPA A Ukrainian servicemen on a front line in the east of Ukraine. LIVE – Updated at 11:11 Russian president Vladimir Putin is being briefed on a ... Read more »

A restaurant chain's owner says her family was threatened after one of the chain's locations said it'd fire workers who didn't get enough 5-star Google reviews

© Provided by Business Insider A sign posted at the Tio Taco and Tequila Bar in Edison, New Jersey, said front-of-house staff had to get a minimum of five five-star ... Read more »

PNP seizes 526 loose firearms in street inspections in January

Philippine National Police building About 526 firearms confiscated by the Civil Security Group – Supervisory Office on Security and Investigation Agencies (CSG-SOSIA) through street inspections were turned over on Wednesday, ... Read more »

Buttigieg vows help as US car fatalities keep spiking higher

WASHINGTON — Transportation Secretary Pete Buttigieg is vowing to help stem rising traffic fatalities, releasing a broad-based strategy aimed at reducing speed, redesigning roads and boosting car safety features such ... Read more »

Nasa makes astonishing Mars water discovery that could change everything we know about the planet

NASA has revealed that water once flowed on Mars for much longer than previously thought. A new study claims that the Red Planet likely had flowing rivers around 2 billion ... Read more »

Kemar Roach recalled as West Indies announce a strong 15-man squad for India ODIs

© Provided by WION Kemar Roach was called up to the West Indies one-day squad for the first time in nearly two-and-half years on Wednesday with the fast bowler returning ... Read more »

Honduras: Xiomara Castro to be sworn in as first female president

© Provided by DW Former first lady Castro will be taking over after two terms of Juan Orlando Hernandez. President-elect Xiomara Castro is scheduled to be sworn in as the first ... Read more »

Katie Price claims she's in talks to make 'dramatised' TV show about her life

© Provided by Cover Media Katie Price Katie Price has claimed she’s in talks with executives at Netflix and Prime Video about making a dramatised TV series of her life. ... Read more »

Kieran Devlin: Premier League side now 'in for' Celtic gem who was involved last night - report

© Provided by Transfer Tavern Europa League – Group G – Celtic v Ferencvaros Chelsea have joined Liverpool in the race to sign Celtic youngster Ben Doak, according to reliable ... Read more »

TSB swings to back to profit, but cautions over inflation hit to borrowers

© PA Archive TSB High street bank TSB has revealed record mortgage lending helped it returned to profit in 2021, but warned over pressure on households and businesses from soaring ... Read more »

Christian Pulisic: Life at Chelsea is tough and playing out of position has been a struggle

© NMC POOL Christian Pulisic: Life at Chelsea is tough and playing out of position has been a struggle – NMC POOL Christian Pulisic has become the latest Chelsea player ... Read more »

Elderly Jewish bakers suffer ‘vicious' anti-Semitic attack on the night before Holocaust Memorial Day

A man launched into a “vicious” anti-Semitic assault on two Jewish men as they closed their bakers in Stamford Hill on the night before Holocaust Memorial Day. Two bakers, one ... Read more »

Cristiano Ronaldo picked up Georgina Rodriguez from work in Bugatti and sent staff wild

Georgina Rodriguez says travelling on Cristiano Ronaldo ‘s private jet has put her off jumping on a normal plane with her footballer partner. The Spanish beauty, a £10-n-hour shop worker ... Read more »

Seven bizarre claims from Prince Andrew's legal papers that spark more questions than answers in rape lawsuit

PRINCE Andrew has issued a defiant response to the sex abuse claims brought against him, as he faces charges of assault in the US. The Duke of York has denied ... Read more »

How we bought £340,000 three-bed first home with a £17,000 deposit – and you could do it too

IT can be hard to find a home with a tiny deposit – but it's not impossible. First-time buyers Callum Paddy and Kye Strowbridge explain how they bought a £340,000 ... Read more »

What's next for the Yankees after Aroldis Chapman?

AP; Robert Sabo; Getty Images Aroldis Chapman is coming off a season in which he finished with some of the worst numbers of his career. From a career-high WHIP of ... Read more »

Douglas Luiz enters Arsenal transfer radar with club set to miss out on Bruno Guimaraes as Newcastle near deal

© Getty Images Douglas Luiz jan 22 Arsenal are weighing up a move for Aston Villa midfielder Douglas Luiz as they look set to miss out on Lyon‘s Bruno Guimaraes. ... Read more »

Barry Cryer: Comedy legend dies, aged 86

Comedian Barry Cryer has died, he was 86. Tributes have been pouring in on social media. Broadcaster Piers Morgan said Cryer was “such a warm, funny and talented man. A ... Read more »

Two Orthodox Jewish men assaulted in Stamford Hill, London

© (photo credit: JPOST STAFF) Breaking news Two Orthodox Jewish men were assaulted in what is presumed to be an antisemitic attack in Stamford Hill, London, according to a report ... Read more »

NHS staff Covid absences falling but still higher than before Christmas

Covid-related absences of NHS staff at hospitals in England are continuing to fall, but levels are still higher than before Christmas, new figures show. An average of 30,375 NHS staff ... Read more »

The true story of Cristiano Ronaldo blocking Transfermarkt shows his elite mentality

Cristiano Ronaldo is one of the greatest players to have ever played football. Some will say he is the greatest. The Portuguese superstar has won five Ballon d’Ors, five Champions ... Read more »

Former Preston North End boss set for key Hearts role

© Tynecastle will soon have a new youth chief. The 54-year-old is poised to replace Roger Arnott, who parted company with Hearts last week. Club officials are seeking to make ... Read more »

Swansea City keen to strike transfer agreement for Watford player

© Provided by Football League World domingos quina Championship side Swansea City are attempting to sign Portuguese midfielder Domingos Quina from Watford, according to Football Insider. The 22-year-old is currently ... Read more »

Truss to meet Stormont leaders amid mounting political tension over protocol

Foreign Secretary Liz Truss will meet Stormont leaders later amid intensifying DUP attempts to stymie the operation of Brexit’s contentious Northern Ireland Protocol. Ms Truss, who is leading UK negotiations ... Read more »

M&S sandwich-maker Greencore could face rebellion over bonus plans

© Provided by The Guardian Photograph: Paul Childs/Reuters The sandwich-maker Greencore could face a shareholder rebellion on Thursday over plans to pay out hundreds of thousands of pounds in executive ... Read more »

Government mulls model for staggered opening of schools following all Covid protocols

The union government is working on a model for staggered opening of schools for physical classes following all COVID-19 related protocols, sources said on Thursday. Schools have been closed in ... Read more »

Pop-up car and taxi ban in Bishopsgate could be a fixture

More than 8,000 bike journeys a day were being recorded after cars were banned (Will Norman) One of the most controversial “pop-up” schemes to discourage vehicles in central London will ... Read more »

Beijing's Olympic bubble makes a slightly surreal experience

1 / 5Beijing Olympics The BubbleFILE – A member of airport personnel dressed in protective gear leads passengers into the customs area at the Beijing Capital International Airport ahead of ... Read more »

Katie Price's Mucky Mansion viewers are all saying the same thing as she makes big blunder while fixing mouldy chimney

KATIE Price was confronted with a major mould problem inside her Mucky Mansion in the first episode of her home renovation series. The 43-year-old was shown black damp coming through ... Read more »

Who screwed up COVID-19 testing? Blame Trump, Biden and our health care bureaucracy.

Under Donald Trump, the CDC sent out poorly designed, contaminated tests that recorded false readings. Under Joe Biden, testing is still in shambles. Read more »

EU files a WTO case against China for targeting Lithuania

The European Union has angered China by launching a case against Beijing at the World Trade Organization (WTO) for targeting Lithuania over its stance on Taiwan. Thursday’s move by Brussels ... Read more »

Tata group regains control of debt-laden Air India

FILE- Air India planes are parked at Indira Gandhi International Airport in New Delhi, India, Monday, Aug. 30, 2021. Tata Sons, India’s oldest and largest conglomerate, on Thursday regained the ... Read more »
On free-english-test.com you will find lots of free English exam practice materials to help you improve your English skills: grammar, listening, reading, writing, ielts, toeic