RBI likely to raise reverse repo rates
The Reserve Bank of India (RBI) is anticipated to keep its repo rate unchanged on Thursday, but several economists expect the reverse repo rate to rise as part of a plan to decrease excess liquidity injected into markets earlier in the month.
After Maharashtra proclaimed a day of bereavement on Monday following the death of iconic singer Lata Mangeshkar, the RBI’s monetary policy committee (MPC) meeting was postponed until Thursday (February 10).
According to a Reuters poll of economists, the RBI would hike the reverse repo rate, which it uses to borrow money from banks, to 3.55 percent from 3.35 percent, closing the gap between it and the repo rate to 45 basis points.
According to a little over half of the respondents, the repo rate will rise by 25 basis points at the next meeting in April, and two-thirds expect another similar hike later in the year.
“After months of incremental moves, we think the RBI will take a decisive step towards policy tightening by hiking the reverse repo rate at the conclusion of its MPC meeting,” said Shilan Shah, senior India economist at Capital Economics.
Since May 2020, the MPC has kept the key repo rate at record lows and repeatedly stated that it will continue to promote growth while maintaining an accommodative stance until the economy has fully recovered.
Market participants, on the other hand, believe it is past time for the RBI to return its focus to inflation control, or at the very least change its position at the forthcoming review to “neutral” from “accommodative.”
Retail inflation reached a five-month high of 5.59 percent in December compared to the previous year, while wholesale price-based inflation, a proxy for producer pricing, slowed slightly to 13.56 percent but remained in the double digits for nine months.
Economists are divided on whether the RBI will be satisfied with evolving its standpoint so soon after a government budget that shakes up bond markets by proposing record-high borrowing and a larger-than-expected fiscal deficit.
“Focus is likely to return to financial market stability amidst a challenging global policy backdrop. Bond yields have risen sharply following a high borrowing programme for 2022–23, with market participants counting on the central bank’s support to quell the pace of rise,” said Radhika Rao, economist at DBS Bank.
“A 20 bps reverse repo rate is a possibility at this week’s meeting, but the change in stance might be scheduled for 2Q,” she added.