Reserve Bank of India may raise reverse repo rate next week
The Reserve Bank of India (RBI) is forecast to raise the reverse repo rate as early as next week — in the first big step towards policy normalisation as it looks to sponge the excess liquidity out of the system amid better prospects for the domestic economy with the US Federal Reserve likely to cut back on its bond purchases by the end of this calendar year.
Citigroup economists Samiran Chakraborty and Baqar Zaidi said the central bank could raise the reverse repo rate — it is the rate at which the RBI mops up liquidity from the system — by 15 basis points in its October monetary policy. The six-member monetary policy committee (MPC) of the RBI will meet for three days from October 6. Bond markets were expecting the RBI to raise the repo rates only in December.
Since the start of the pandemic, the RBI has ensured there was surplus liquidity in the system to keep the cost of funds low and boost economic growth. This had resulted in the reverse repo becoming the operative repo rate.
There were some indications of policy normalisation in the August meeting of the rate panel when the central bank increased the size of the variable rate reverse repo auction — which is of a longer duration than the overnight reverse repo — to Rs 4 lakh crore against Rs 2 lakh crore earlier, though RBI governor Shaktikanta Das had denied it was a case of liquidity tightening.
The RBI in a surprise move on Wednesday has set a higher cut-off yield for the 7-day variable reverse repo auction at 3.99 per cent which is closer to the repo rate of 4 per cent and not that of the reverse repo which is 3.35 per cent.
“Increasing size and cut-off rates of recent VRRR auctions might have indicated the RBI’s willingness to normalise the liquidity management operations earlier than expected. Hence, we shift our 15 basis points reverse repo hike forecast to the October policy from December earlier,’’ the Citi economists said.
They said they were expecting MPC to give a modest nudge towards liquidity normalisation next week but the RBI’s manoeuvres in the last fortnight has opened up other possibilities. This includes the 3.99 per cent cut-off in the latest VRRR auction, substantially higher than the 3.4-3.5 per cent range set earlier.
“One can infer from this that the RBI is willing to normalise the liquidity management operations by reducing the amount absorbed under the fixed rate reverse repo and also bring the operative rate closer to the repo rate,’’ the note said.