Money & Banking

Reverse repo hike to be split between Dec and Feb policy reviews: Acuité

Our Bureau | | Updated on: Nov 30, 2021
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The anticipated move in reverse repo rate from 3.35 per cent currently to 3.75 per cent by February 2022 would help restore the width of the policy rate corridor to its normal level

With ongoing calibration of liquidity surplus acting as a precursor, Acuité Ratings and Research expects a hike in the reverse repo rate, which is likely to be split between December 2021 and February 2022 policy reviews.

The anticipated move in reverse repo rate from 3.35 per cent currently to 3.75 per cent by February 2022 would help restore the width of the policy rate corridor to its normal level of 25 basis points/bps (with repo rate being maintained at 4 per cent) from the current spread of 65 bps, the credit rating agency said in a report.

“Having said that, we remain watchful of the risks emerging from the fresh resurgence of Covid cases in Europe and Africa along with the uncertainty on the impact of the new variant (Omicron),” it said.

“This has the potential to reverse the ongoing travel liberalisation and can possibly dampen global growth prospects. This can also reinforce the “wait and watch” approach of RBI, thereby slowing down the progress on its policy normalization path,” Acuité said.

The LAF corridor effectively defines the operating procedure of monetary policy, with the marginal standing facility (MSF) as the upper bound (ceiling), the fixed overnight reverse repo rate as the lower bound (floor) and the policy repo rate in between.

Expect rise in yields

Suman Chowdhury, Chief Analytical Officer, Acuité, observed that from the bond yield perspective, while yields at the shorter end of the curve are poised to remain firm amidst growing expectations of central bank accelerating its policy normalisation, the 10-year government security (G-Sec) yields are expected to average towards 6.5 per cent by March 2022.

The report noted that after bottoming out at 5.97 per cent in May 2021, India’s 10-year G-Sec yield has been gradually creeping up with bond yields averaging at 6.35 per cent in November 2021, the highest since the beginning of the pandemic.

Since the start of H2FY22, the 10-year G-Sec yield has moved up by a cumulative 18 bps. One basis point is equal to one-hundredth of a percentage point.

The agency assessed that the impact on the shorter end of the curve has been more pronounced as yields on 1-3 year maturity government bonds jumped by about 20-50 basis points during the same period.

Effect of commodity price hike

While there has been relief from concerns over additional government borrowing in H2FY22 along with the moderation in inflation trajectory, the firmness in the yields is largely a reflection of a steep rise in global commodity and crude oil prices along with commencement of liquidity normalisation by the RBI since the last MPC, the agency said.

The rise in short term g-sec yield has been in focus as this is an outcome of active calibration of money market liquidity by the RBI.

“Acuité believes that monetary policy normalisation will continue in the major global economies given the extended period of higher inflation but the speed may vary across the central banks, depending upon their assessment of the residual pandemic risks,” it said.

“India is also expected to continue with the gradual approach to normalization and a phase-wise increase in the reverse repo rate can be envisaged in the current fiscal,” Chowdhury said,

The central bank in its last MPC meeting had augmented its liquidity calibration effort through the expansion of the scope of VRRR (variable reverse repo rate) auctions along with discontinuation of the government bond acquisition programme (G-SAP).

Published on November 30, 2021

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