The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) commenced its 3-day meet from February 8, 2022, which will continue till February 10, 2022, when the MPC will announce its last policy decision for the financial year 2021-22.
The RBI Monetary Policy Meet comes amid rising inflation, surging crude oil prices and a record borrowing program of the government, as announced in the Budget 2022.
Thus, most experts expect a hike of 25 bps in the reverse repo rate.
Gross borrowing for the year FY23 was announced at ₹14.95 lakh crore, in the Budget and net borrowing at ₹11.6 lakh crore, much higher than expectations.
As per global brokerage house Barclays, the RBI MPC may go for a hike of up to 0.25 percent in the reverse repo rate at which the RBI absorbs excess liquidity and leave the repo rate at which it lends, to narrow the policy rate corridor.
What is reverse repo?
Reverse repo rate is the interest paid by RBI to banks when they park their surplus funds with the RBI. Currently, it stands at 3.35 per cent. When the central bank raises reverse repo rate, it gives an incentive to the banks for parking funds with it instead of using it for commercial lending.
"Growth concerns amid spread of the Omicron variant and relatively benign inflation out-turns provide the RBI with enough room to maintain its growth-supportive monetary policies," Barclays said.
Meanwhile, Emkay believes that the MPC policy is a close call as RBI needs to balance policy conundrums amid surging term premia. While a mild 15-25 bps hike in the fixed reverse repo (RR) may not be too disruptive at this stage, markets will still have to be assuaged over material tightening of financial conditions, it added.
"The gradualist approach toward liquidity and rate normalization may be challenged by various global and domestic push-and-pull factors. The macro adjustment owing to changing global and domestic dynamics has so far been borne by the rates market while the FX market has been resilient. Amid ultra-elevated term premia, India's current real rates look reasonable vs. Ems, given the present crosscurrents. This could give some leeway to the RBI's reaction function to conduct shallow normalization," the brokerage further explained.
However, Bank of America Securities believes that the MPC is likely to maintain the status quo on interest rates in the upcoming policy review.
"The Reserve Bank will leave rates unchanged next week, recognising growth-focused and capex-driven fiscal expansion, which though poses huge price pressure and interest rate risks later," BofA Securities noted.
The repo rate has been at its all-time low of 4 percent, since May 2020, even though bond yields have been rising for some months now.
Stating that the Budget prioritises growth over fiscal consolidation, BofA analysts said they see the MPC leaving rates unchanged on February 9 when the central bank will unveil the last policy review of this fiscal, and undertake gradual tightening measures.
Vivek Rathi, Director - Research, Knight Frank India also expects key policy rates to be maintained for some time before the economy conclusively comes out of the pandemic third wave.
"We believe that the central bank will keep a close watch on consumer inflation level, which is elevated but within the tolerance band. Given the high inflationary expectations on account of increasing crude oil and commodity prices, accelerated liquidity tightening measures are expected," Rathi noted.
Meanwhile, Umesh Revankar, Vice Chairman & MD, Shriram Transport Finance expects the RBI to continue its path of policy normalization but, rather slowly.
"Given that on one hand uncertainty around the Covid variants continue and growth is still uneven, inflationary expectations remain high and global central banks are withdrawing easy monetary policy, against this backdrop, we expect the RBI to continue its path of policy normalization but, rather slowly. As food inflation is likely to be benign, we expect the RBI to hike reverse repo rate first and then maybe towards the second half of 2022 there could be a hike in the repo rate as well," Revankar stated.