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RBI expected to increase reverse repo rate by 25 bps

The Reserve Bank of India will announce the monetary policy on February 10, 2022. Here is what leading economists and BFSI stakeholders expect from the regulator. 

Shanti Ekambaram, Group President, Consumer Banking, Kotak Mahindra Bank:
With global inflation pressures, global central banks tightening monetary policies, rising oil prices, domestic inflation, and a sharp rise in domestic yields, the MPC will be walking a tightrope. The MPC has prioritised growth and given enough liquidity during the last two years. However, growth has been slowly rebounding in recent months. Rates have risen across the yield curve as a result of the RBI’s liquidity normalisation measures. Given that the overnight call rate is closer to 4%, we expect the RBI to change the reverse repo rate by up to 25 bps or make repo the operative rate. While a repo rate hike is not expected, it is possible that the MPC might change their stance to neutral from accommodative. 

Jahnavi, Economist, Bank of Baroda Economic Research: Given the assurance of growth in the budget and the possibility of rising inflation, mainly due to crude oil, we expect the RBI to initiate the process of normalisation by raising the reverse repo rate by 25 bps. There will be no change in the repo rate this time even though we expect a 50bps hike next year. There could be a slight downward revision in the GDP growth rate for FY22. Will there be a change in stance? Probably not this time, but the increase in the reverse repo rate will give a signal about the future direction of rates. 

YS Chakravarti, MD and CEO, Shriram City: We expect a repo rate status quo, with a reverse repo rate hike of 25bps. The RBI needs to address rising inflation, liquidity normalisation, rising long-term yields, and global tightening by Fed/ECB/BoE. On the demand side, there is renewed demand for credit, with FY22-January 14, 2022, showing credit growth of 8% but still trailing FY19 credit growth levels of more than 14%. Interestingly, in the third quarter of FY22 at Shriram City, we witnessed record disbursements led by MSME and 2-wheeler loans. Therefore, we believe that an increase in credit in the second half of FY22 signals an increase in economic activity. The infrastructure spending in Budget 2022 will boost the economy even more in FY23. 

Lakshmi Iyer, CIO (Debt) & Head, Products, Kotak Mahindra AMC: After a shocker for bond yields post the budget, all eyes are now on the MPC meeting. Given the massive borrowing for FY23, there are hopes for RBI to announce OT (operation twist), which could act as an anchor to long term bond yields. We anticipate that the reverse repo rate will be raised while the other rates will remain unchanged. We do not expect any major tweaks to GDP or inflation forecasts. 

Dr Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI: The large size of the FY23 market borrowings at Rs 14.3 trillion, along with no progress on the inclusion of the Indian debt market in global bond indices, raises the question of whether the RBI will have to postpone liquidity normalisation in order to support the massive borrowings programme. The bigger question is the blurring of debt management and liquidity management operations of the RBI. 

We estimate that demand for bank securities will be around Rs 4.2 trillion (considering NDTL increase of 10% and 27% of SLR). The insurance sector might contribute Rs 2.7 trillion. This implies RBI will have to still ensure a demand of at least Rs 2 trillion through OMO purchases. This leaves the question of liquidity normalisation complicated. The RBI may have to change the composition of outstanding as well as fresh/to-be-issued papers in FY23 with medium duration offering /10 years and below elbowing longer tenor papers to balance redemption pressures in the future. 

Any delay in raising deposit rates may result in a large incremental increase later on as banks will have to catch up. Lending rates must likewise rise in order to preserve margins. However, this will be a catch-22 situation because high lending rates will jeopardise the incipient recovery. This conundrum will get more complicated in FY23. 

We believe the time is now appropriate to go for a 20 bps hike on the reverse repo rate.

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