The Reserve Bank of India (RBI) and Monetary Policy Committee on Wednesday raised repo rates by an expected half a percentage i.e. 50% basis point to 4.90% the real GDP growth for 2022-23, raising inflation forecast to 6.7% from 5.7%. Earlier street estimates were ranging between 6.5% to 7.2% so some expert may have found the forecast a little hawkish. Bond yields however fell after the policy because markets had discounted the 50 bases point.
There are the two bites of the governor for the reader and who are not familiar with this jargon. In the press conference, governor said that the MCP is committed to bringing the monetary policy to normal is when the overnight rates (call rates) aligns with the repo rate ( a rate at which RBI lends money to banks) but if you look at currently RBI is actually taking money from banks at SDF rates because there is too much liquidity so RBI’s idea is to drain liquidity and go to stage where repo-rates becomes operational.
In his speech, Das said that the way RBI looks at normal condition and so is the MPC. He also stated that the standing deposit facility (SDF) rate has been reduced to 4.65%, and the marginal standing facility rate and the Bank rates have been reduced to 5.15%. He noted that the repo rate is still lower than it was before the pandemic.
Analysing on above stated point this could mean that there is definite subtle change and if one overarch framework of what governor meant by normalization is not necessarily from just rate perspective or even the size of liquidity perspective but with respect to where the weighted average call rate is so they define normalcy as when interbank call rate tracks the higher end of the repo part of the corridor and not the lower end of the corridor so to that extent there is a change but bear in mind that system liquidity is maybe around 3.5 lakh crore now and all it requires for RBI to get that interbank call rate to move from the lower end corridor to the repo rate is just a 14 day v triple r announcement or seven day v triple r announcement where they take money from the banking system lowering overnight surplus less than a lakh. At the margin side one will have weighted average call rate going to be closer to repo rate so there is nothing much to be read into this but the fact that they have all the tools now because of the size of the liquidity being only 3.5lakh cr at the same time one has to be caution as 3.5 lakh cr is only because the government is running a big surplus the actual core liquidity is to the extent of around 6 lakh cr so it’s quite possible that RBI is relying on the currency leakage as it happens during the course of the year as well as BOP negativity along with that intervention that RBI is doing in the extent they do it in the pot market to take out some liquidity.
According to market experts, estimates shows that on natural process the liquidity are going to close to neutral or less than lakh of growth by end of the year so any which way we don’t expect RBI to do open market operation as well as on CRR hike.
Further adding three more points of what governor has been saying that withdrawal of liquidity is over a multi- year cycle but suddenly they started counting multi-year from last year which means they can end the liquidity surplus this year. Secondly, he elaborated how they can do operation twist that is selling short term bonds and buying long bonds. Reading all these three points RBI is trying to give hints that they are going to withdraw liquidity and tighten the system.