RBI expected to hold repo, may hike reverse repo rate

RBI expected to hold repo, may hike reverse repo rate
© Provided by The Times of India

Mumbai: The Reserve Bank of India (RBI) is likely to hold its repo rate (currently 4%) in the forthcoming monetary policy on December 8. However, attention has for the first time shifted to the reverse repo rate — the rate at which the RBI borrows from banks. The reverse repo has come into focus as the central bank has indicated that it will start normalising liquidity in December even while retaining an accommodative stance. This is seen by some as a pointer to a reverse repo rate hike from the present level of 3.35%.

What this means is that for borrowers this is as good as it gets and rates will only rise in future. For depositors, there is finally some prospect of banks offering slightly better returns. “We still believe policymakers remain on track to initiate monetary policy normalisation. We do expect the RBI to hike the reverse repo rate by 20 basis points (100bps = 1 percentage point) during the policy meeting,” said Rahul Bajoria, chief economist with Barclays Investment Bank.

One reason for this expectation is the solid macro numbers following the festival season. Also, the government’s decision to cut taxes on fuel last month has eased inflation fears. The detection of the Omicron variant has stalled inflation in global commodity prices, particularly crude oil.

“The RBI has already embarked on a policy normalisation path with the introduction of variable reverse repo rate (VRRR) auctions. We expect it to take further steps — a 20bps hike in the reverse repo rate at the December 8 policy meeting, followed by 20bps more in February. Repo rate hikes are likely to follow in mid-2022,” said HSBC chief economist Pranjul Bhandari.

However, State Bank of India chief economic adviser Soumya Kanti Ghosh is of the view that the RBI will be able to achieve its goals without any revision in key policy rates. “We believe the talks of a reverse repo rate hike in the MPC (monetary policy committee) meeting may be premature as the RBI has been largely able to narrow the corridor without the noise of rate hikes and ensuing market cacophony,” said Ghosh.

The central bank had responded to the Covid pandemic by releasing vast amounts of money into the banking system, resulting in a surplus of close to Rs 11 lakh crore earlier this year. Liquidity remains in the surplus mode with the average daily net absorption under the liquidity adjustment facility (LAF) at Rs 7.6 lakh crore as of November.

The minutes of the earlier MPC meeting give an insight into the thinking of the RBI members. While the external members sought normalisation of the surplus liquidity, they wanted the central bank to maintain an accommodative stance. Unlike the past when the central bank relied strongly on signalling, the RBI is seen to be achieving its goals through multiple tools such as VRRR, open market operations and intervening in the forward foreign exchange markets.

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