The Reserve Bank of India (RBI) is likely to signal a gradual unwinding of emergency liquidity measures introduced after the Covid-19 outbreak but keep key interest rates unchanged in its bi-monthly monetary policy review this week, a Mint survey of economists showed.
While the central bank is expected to retain its accommodative stance, it may hint at the coming policy normalization. RBI’s monetary policy committee will announce its decision on October 8.
Nine out of 10 respondents expect RBI to maintain its accommodative stance and keep policy rates unchanged, including the repo rate at 4%. Only one economist expects a 15 basis points hike in the reverse repo rate, the rate at which the central bank absorbs excess liquidity.
The respondents were divided over whether RBI will absorb the excess liquidity of ₹12 lakh crore through long-term variable rate reverse repo (VRRR) auctions. Under a variable rate reverse repo auction, RBI absorbs liquidity at variable rate as opposed to a fixed rate under the usual reverse repo. With RBI resuming 14-day VRRR auctions from August, and announcing several such auctions of 3-7 day tenor in recent weeks, a majority of economists expects an increase in VRRR auction size, and also longer tenor VRRRs of 28 days or 56 days. The recent cut-off at the latest seven-day VRRR auction at 3.99%, closer to the repo rate, is another reason why the bond market is interpreting it as a normalization signal. A longer term VRRR auction is conducted depending on RBI’s prognosis of the market and for how long it wants to keep the liquidity out of the system
Some economists, including those at Standard Chartered Bank and Deutsche Bank, have advanced their policy normalization expectations amid concerns of rising domestic inflation from high oil and global commodity prices and a sharp increase in the pace of vaccination. However, they expect RBI to watch out for any possibility of a third wave and ensure an accommodative policy to support festive season demand, before hiking reverse repo rate in December.
{{/usCountry}}Some economists, including those at Standard Chartered Bank and Deutsche Bank, have advanced their policy normalization expectations amid concerns of rising domestic inflation from high oil and global commodity prices and a sharp increase in the pace of vaccination. However, they expect RBI to watch out for any possibility of a third wave and ensure an accommodative policy to support festive season demand, before hiking reverse repo rate in December.
{{/usCountry}}In the August policy, Jayant Varma was the only MPC member who said the reverse repo rate of 3.35% was no longer appropriate. “The period of active liquidity infusion from RBI is likely behind us, and we could see the central bank stepping up its liquidity absorption in the coming months. Increased quantum of liquidity absorption along with an extended tenor through VRRR, frequent resort to ‘Operation Twists’—aka the simultaneous purchase and sale of government bonds are likely the way forward for RBI,” said Rahul Bajoria, chief economist at Barclays Bank.
Other economists, however, said any change to the VRRR auction is ruled out before the festive season. “On liquidity management, an increase in VRRR size is unlikely as the busy festival season is likely to drain out liquidity organically. A lower borrowing programme by the government further requires less liquidity to be absorbed,” said Anubhuti Sahay, chief economist, Standard Chartered.