RBI likely to hike reverse repo rate in next policy review

As it was widely expected, the RBI kept its policy rate and stance unchanged with a reasonably dovish bias. However, this meeting was a kind of writing on the wall that a hike in reverse repo rate is round the corner. And if analysts' predictions are any indication, we may see a hike in the reverse repo rate by not less than 20 basis points in the forthcoming policy review meeting, due in February. If it happened so, then it will set a ball rolling for the normalization of monetary policy. Though, the February budget is also likely to have its bearing on the direction the key policy rates go.

The MPC unanimously kept the repo rate unchanged at four per cent along with accommodative stance with the same forward guidance on the stance. The MPC noted the global risks emanating from surge of infections and emergence of the Omicron variant, persistence of supply-chain disruptions, elevated energy and commodity prices, and possibility of a quicker-than-expected taper by Fed. The RBI also continued to rebalance liquidity conditions in a non-disruptive manner. Notably, from January onwards, liquidity absorption will be undertaken mainly through the auction route.

The MPC retained its FY22 CPI inflation projection at 5.3 per cent noting that the flare-up in vegetable prices due to heavy rains is likely to reverse with the winter arrivals, and supply-side interventions by the government continue to restrain the pass-through of elevated international edible oil price to domestic retail inflation.

On the growth front, the MPC retained its FY22 real GDP growth projection at 9.5 per cent noting the downside risks from volatile commodity prices, persisting supply-side disruptions, new mutations of the virus, and potential global financial market volatility.

The tone has been adequately dovish with the MPC highlighting that their overarching objective remains pro-growth for now even though price stability remains a concern. The RBI stays cautious on growth in the near term while expecting a relatively strong growth path in 1HFY23. As expected, the highlight of the policy remained on liquidity normalization measures. The RBI has very finely signalled its intention of more aggressive liquidity normalization from January onwards. The RBI has committed to shift most of the liquidity management through the auction route from the next month and has also refrained from committing to any tenor.

However, if growth turns out to be better than RBI projections and Omicron threat doesn't materialize, a 15-20 bps hike in reverse repo rate in February cannot be ruled out. The hike in reverse repo rate will be immediately followed by similar hike in repo rate too.

The issue was if the global central banks like US Federal Reserve begin increase their interest rate, RBI will be compelled to do so as per the Hobson's choice. Otherwise, foreign investors will start selling the less attractive Indian bonds. So, let's be ready for hike in key policy rate post budget.