The reverse repo has come into focus as the central bank has indicated that it will start normalizing liquidity in December, even if it maintains a lenient stance. This is seen by some as a sign of an increase in the reverse repo rate from the current level of 3.35%.
This means that for borrowers it is as good as it gets and rates will only go up in the future. For depositors, eventually banks are likely to deliver slightly better returns.
“We still believe that policy makers are on track to initiate monetary policy normalisation. We expect the reverse repo rate to increase by 20 basis points (100 basis points) during the RBI policy meeting,” said Rahul Bajoria, chief economist at Barclays Investment Bank. BPS = 1 percentage point).
One reason for this expectation is solid macro numbers after the festive season. Also, the government’s decision to cut taxes on fuel last month has allayed fears of inflation. Inflation in global commodity prices, especially crude oil, has been halted by trace of the Omicron variant.
“RBI has already embarked on a policy normalization path with the introduction of Variable Reverse Repo Rate (VRRR) auction. We expect it to take further steps – a 20 bps hike in the reverse repo rate in the December 8 policy meeting, followed by 20 bps more in February. HSBC Chief Economist Pranjul Bhandari said a hike in the repo rate is likely to happen in the middle of 2022.
However, Soumya Kanti Ghosh, Chief Economic Adviser, State Bank of India believes that the RBI will be able to achieve its targets without any revision in key policy rates.
“We believe there is talk of a hike in the reverse repo rate MPC The (Monetary Policy Committee) meeting may be premature as RBI has largely been able to narrow the aisle without the noise of rate hikes and market commotion,” Ghosh said.
The central bank had responded to the Covid pandemic by releasing huge amounts of money into the banking system, resulting in a surplus of around Rs 11 lakh crore earlier this year. Liquidity remains in surplus mode with an average daily net absorption under the Liquidity Adjustment Facility (LAF) at Rs 7.6 lakh crore till November.
Minutes of the last meeting of the MPC give an insight into the thinking of the members of RBI. While outside members demanded normalization of surplus liquidity, they wanted the central bank to maintain a liberal stance.
Unlike in the past when the central bank relied strongly on signalling, the RBI is seen to achieve its goals through a number of instruments such as VRRR, open market operations and further interventions in the forex markets.
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