reverse repo rate: ET Poll: Reverse repo rate may be hiked by 15-40 basis points
An ET poll of 22 banks, funds and financial institutions showed that the monetary policy committee (MPC) at the central bank would evaluate inflation risks that could cloud India’s growth prospects amid rising crude prices and local interest rates.
The Monetary Policy Committee on Sunday rescheduled its bi-monthly review meeting to February 8-10 citing public holiday due to the demise of singer Lata Mangeshkar.
Reverse repo rate is the interest banks earn by parking their surplus funds with the RBI.
Move to support fiscal borrowing plan
Reverse repo rate currently stands at 3.35%. Repo rate at 4% is what the central bank earns by lending to banks.
“This time, the monetary policy is expected to take a call on growth in particular as the budget is sanguine about the same,” said Madan Sabnavis, chief economist at Bank of Baroda. “This stance will be a pre-requisite for the commencement of the plans for liquidity normalisation.”
“A likely reverse repo hike will be in line with supporting fiscal borrowing plan as a rise in interest cost is already factored in,” he said.
While nearly three-fourths of the poll respondents expect a hike in the reverse repo rate, about half of them are betting on a change in the policy stance. The central bank’s rate stance is now ‘accommodative’. Any change will make it to ‘neutral’, a precursor to sustained rate increases.
A change in stance is also seen in line with the central bank’s normalisation of liquidity in the system that now stands at Rs 7.06 lakh crore compared with Rs 5.75 lakh crore at the end of January.
“Growth is yet to pick up for small businesses across the country, which was evident from budget focus areas by way of extending the guarantee period by one more year,” said A Balasubramaniam, managing director, Aditya Birla Mutual Fund. “RBI needs to be convinced about growth and a rising inflation trajectory as it cannot reverse its policy decisions once it is hiked.”
“It will likely change its stance to neutral first to prepare markets for a long northward rate journey,” he said.
New Delhi extended the emergency credit guarantee scheme to give fresh impetus to bank credit with lenders finding increasing comfort in the viability of businesses.
Government’s higher borrowing
North Block is aiming to borrow Rs 14.95 lakh crore from the debt market in 2022-2023. The estimated figure is much higher than an average market expectation in the range of Rs 12-12.50 lakh crore.
Bond investors rushed to sell sovereign papers anticipating higher supply of securities. The benchmark bond yield spiked as much as 28 basis points pulling prices down last week.
“MPC should focus on disconnection between market rates and policy rates, inflation outlook, especially with rising oil price,” said Soumyajit Niyogi, associate director at India Ratings. “Also, RBI is expected to ensure smooth and undisrupted government borrowing for growth and stability in the financial market as a part of multiple objective framework.”
Last Friday, the central bank had to cancel bond auctions partly for a net of Rs 13,494 crore. It did not accept higher bids for two paper series with three-four years’ residual maturities.
The RBI seems to be on the alert mode for any sudden jump in the federal funding costs, although the Union Budget has already estimated a 15.48% elevation of interest cost in the next fiscal year.
Consumer prices rose 5.59% year-on-year, to a five-month high in December last year. However, they remain in the range of the RBI’s tolerance level of 4-6%.
Brent crude price is at $93 per barrel compared with $80.87 a month ago.