Reserve Bank Of India May Refrain From Reverse Repo Hike
Fifty economists surveyed by Reuters in a December 1-3 poll expect the RBI to hold its benchmark repo rate at 4.00 percent.
The Reserve Bank of India will likely hold off on raising its key borrowing and lending rates on Wednesday, as it adopts a cautious tone amid the spread of the Omicron coronavirus variant, economists and market participants said.
Fifty economists surveyed by Reuters in a December 1-3 poll expect the RBI to hold its benchmark repo rate at 4.00 percent.
The reverse repo rate – the interest rate banks earn for parking short-term funds at the RBI – is mostly expected to remain unchanged at 3.35 percent, but several economists have priced in a small increase as the central bank tries to normalise the gap between the lending and borrowing rate to pre-COVID-19 levels.
“We believe, the RBI may deflate the hype around reverse repo hike in monetary policy by explaining the virtues of using reverse repo change as a pure liquidity tool and not a rate tool,” Soumya Kanti Ghosh, chief economic adviser at the State Bank of India wrote in a note.
The RBI had cut the reverse repo rate more aggressively than the repo rate, widening the gap between the two rates to 65 basis points from 25 bps before the pandemic.
Several other economists felt that given the uncertainties of the new Omicron variant on the economy, it was better to adopt a wait-and-watch approach despite inflationary pressures.
Analysts expect further measures to absorb the liquidity surplus in the banking system and will also closely monitor any changes in growth and inflation projections.
India’s economy expanded 8.4 per cent in the September quarter from a year earlier, the fastest pace among major economies but economists said disruptions from the new virus variant risked slowing the recovery.
Inflation has been within the RBI’s 2-6 per cent target range due to the cuts in taxes on fuel by central and local governments but the damage to perishable food items due to unseasonal heavy rains and telecom price hikes are likely to push inflation up yet again.
“Inflation risks cannot be dismissed as the moderation in September-October inflation is likely to be followed by an updrift back above 5.5-6 per cent in 1Q22,” said Radhika Rao, economist with DBS Bank.
Consumer prices rose 4.48 per cent in October from a year earlier, accelerating from September’s 4.35 per cent.
Rao expects a 20-basis-point increase in the reverse repo rate followed by another hike of a similar quantum in February.
“The pandemic situation is the key wild card, with any signs of a worsening outbreak to push policymakers to err on the side of caution and slip into an extended status quo,” she said.
