Hike in Reverse Repo Rate Likely in Early Feb

An increase in the reverse repo rate early next month now appears rather certain after overnight call rates exceeded returns the central bank gives lenders for parking their excess funds. A rise in the repo rate, at which Mint Road lends to banks, is also a possibility if the budget deficit exceeds 6.5% of India’s gross domestic product (GDP).

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) is expected to give its verdict on key rates on February 9, less than two weeks after the US Federal Reserve dropped sufficient hints of a lift-off in benchmark rates – perhaps as early as March.

India’s broadest stock gauges have retreated about 8% from their peaks on expectations that the US Federal Reserve will accelerate the pace of monetary tightening, which will include higher rates and a slimmer balance sheet, to restrain inflation.

Back home, the MPC meeting comes amid waning concerns over the economic impact of Omicron infections, but rising worries of a spiral in retail inflation that has crossed the upper end of the central bank’s tolerance threshold of 6%.

Given this backdrop, the MPC is also set to begin the cycle of rate tightening, perhaps as early as February.

“With the Indian economy sustaining a strong recovery, the RBI will be more amenable to raising interest rates in response to the persistence of high inflation,” said Prasenjeet Basu, chief economist at ICICI Securities.

“We expect the policy rate to rise by 50 bps over the course of 2022.”

One basis point is 0.01%.

The repo rate, or the rate at which the central bank lends, is at 4% since May 2020. The reverse repo rate at which banks park surplus cash with Mint Road is also unchanged at 3.35% since then.

“The markets may have factored in that Omicron signals an endemic stage for the Covid cycle, thus leading to faster normalization in economic activity,” said SK Ghosh, group chief economic advisor, State Bank of India. “For India, with… the call rate currently at much higher levels than reverse repo rate, we believe the stage is set for reverse repo normalization.” S-ET

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