The Reserve Bank of India may take further steps towards monetary policy normalisation, including upping the reverse repo rate, say economists.

However, the six-member monetary policy committee (MPC), which will meet between December 6 and 8 may persist with the accommodative monetary policy stance in view of the uncertainty posed by the Omicron variant of coronavirus.

“The RBI has already embarked on a policy normalisation path with the introduction of Variable Reverse Repo Rate (VRRR) auctions. We expect it to take further steps – a 20 basis points (bps) hike in the reverse repo rate at the December 8 policy meeting, followed by 20 bps more in February. Repo rate hikes are likely to follow in mid-2022,” said HSBC Securities and Capital Markets (India) Pvt Ltd’s Pranjul Bhandari, Chief Economist, India, and Priya Mehrishi, Associate.

Also see: New learnings

The reverse repo rate, the interest rate that banks earn for parking short-term surplus liquidity with RBI, is currently at 3.35 per cent. This rate was reduced thrice in calendar year 2020 — from 4.90 per cent to 4 per cent on March 27; to 3.75 per cent on April 17; and to 3.35 per cent on May 22— to encourage banks to lend in the wake of the Covid outbreak.

The policy repo rate (the interest at which RBI provides banks funds to overcome short-term liquidity mismatches) was reduced twice during 2020 – from 5.15 per cent to 4.40 per cent on March 27 and to 4 per cent on May 22 – to ensure that banks have enough liquidity.

‘Eye on Omicron’

DBS, in its India 2022 Outlook: Shifting to a higher gear report, said while on-track recovery and above-target inflation make a case for policy normalisation, authorities are likely to be watchful of the new risk on the horizon – the Omicron variant.

Lakshmi Iyer, CIO – Debt & Head – Products, Kotak Mahindra AMC, observed that central bankers across the globe are grappling with the debut of the Omicron variant. “The path to normalisation has begun across the world, including India, and is less likely to stop for now. We therefore expect a reasonably high chance of 15/20 bps hike in reverse repo rate – a start to reduce the gap between repo and reverse repo rate,” she said.

Iyer opined that the policy stance may remain unchanged and hinge on incremental developments in the near term. She expects VRRR as a tool to normalise liquidity to continue to gain momentum.

Also see: RBI may deflate hype around reverse repo rate hike: SBI report

Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said the RBI may deflate the hype around reverse repo hike by explaining the virtues of using reverse repo change as a pure liquidity tool and not a rate tool.

He emphasised that delaying normalisation measures is prudent in the current situation which would also give time for economic recovery to strengthen further. “We believe the talks of a reverse repo rate hike in the MPC meeting may be premature as the RBI has been largely able to narrow the corridor without the noise of rate hikes and ensuing market cacophony,” Ghosh said.

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