RBI keeps repo rate steady, experts say watch for reverse repo hike in December; Monetary Policy decoded

The Reserve Bank of India’s Monetary Policy Committee (MPC) has kept the repo rate and reverse repo rate steady for the eighth consecutive time in October 2021

shaktikanta das, RBI, RBI meet
RBI Governor Shaktikanta Das announced to maintain the policy stance ‘accommodative’ for as long as necessary to support growth​.

The Reserve Bank of India’s Monetary Policy Committee (MPC) has kept the repo rate and reverse repo rate steady for the eighth consecutive time in October 2021. The monetary policy decision of status quo on interest rates was unanimous by all the six MPC members. RBI Governor Shaktikanta Das announced to maintain the policy stance ‘accommodative’ for as long as necessary to support growth. The vote on continuing with the accommodative policy stance was 5:1. The central bank retained the GDP forecast for the current financial year at 9.5 per cent. While it projected a substantial softening in retail inflation in the near term. The Consumer Price Index (CPI)-based inflation is now projected to be at 5.3 per cent for 2021-22 with risks evenly balanced. RBI Governor Shaktikanta Das also announced to extend the on-tap Special Long-Term Repo Operations (SLTRO) for small finance banks (SFBs) till December 31, 2021. Experts expect reverse repo rate hike from the December 2021 MPC.

RBI may raise reverse repo rate from December MPC

Rahul Bajoria, Chief India Economist, Barclays: Governor Das and the MPC’s statement maintained an accommodative bias, but we note signs that the RBI is preparing the ground for a very modest exit from its highly accommodative policy stance. In our view, the decision to shelve the bond purchase program and maintain only its “twist” operations as a yield-signaling tool suggests the RBI is setting the stage for a gradual exit from very accommodative liquidity conditions. We continue to expect the RBI to pursue faster normalisation through a back-loaded hiking cycle, once it is sure the economic recovery will be sustained. This should keep the RBI on track to raise the reverse repo rate from the December MPC, and we continue to look for repo rate hikes in Q2 22, most likely at the April MPC.

Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank: The MPC is keeping a close eye on a sustained pick-up in growth, given slowing growth patterns in some of the other economies. The policy had a balanced and neutral tone – with continued support for growth and a commitment to a gradual and calibrated change in policy based on emerging data and events.

Amit Tripathi, CIO – Fixed Income Investments, Nippon India Mutual Fund: The RBI policy is driven predominantly by domestic considerations, a gradualistic non-disruptive approach, focusing on liquidity absorption as the first step for normalization. Some disappointment with complete withdrawal of a G-Sap calendar. Though a reiteration of the yield curve as a public good does give comfort on support via twists and OMOs. Curve to remain in range and retain steepness near term.

Nilesh Shah, Group President & MD, Kotak Mahindra Asset Management Company: RBI policy is a “Mai Ho Naa” policy aimed to achieve multiple objectives. Keep growth supported, inflationary expectations under check, financial markets stable, liquidity adequate and appropriate, yield curve in shape and ensure smooth passage of government borrowing program. They have reassured the markets that monetarily policy normalization will be gradual and calibrated.

Additional measures: On-Tap SLTRO, retail digital payment solutions, IMPS transaction limit, Geo-tagging

Shivaji Thapliyal, Lead Analyst – Institutional Equities, YES Securities: There will now be introduction of Digital Payment Solutions in Offline mode, especially in remote areas, after successful pilot. This will serve to popularize digital payments in areas with low internet penetration. The upper limit for IMPS transactions has been enhanced from Rs 2 lakh to Rs 5 lakh. Being an instantaneous transaction platform, it will aid payments via the conventional banking system, ceteris paribus. Geo-tagging of Payment System Touch Points will promote wider deployment of payment infrastructure such as POS terminals and QR codes. This will be positive for fee income for banks in the long run on the acquirer side business. On-tap application will be allowed for the three earlier categories of Retail Payments, Cross Border Payments and MSME lending. This will promote innovation in the fintech space.

VRRR auctions stepped up to Rs 6 lakh crore

Nitin Shanbagh, Head – Investment Products, Motilal Oswal Private Wealth: While the RBI policy was on expected lines, it remains to be seen as to when the stance changes based on pace of economic recovery. With system liquidity remaining extremely high, the 14 day VRRR quantum is being further hiked from the current Rs 4 lakh crore to Rs 6 lakh crore in stages by Dec’21. RBI is also open to introducing 28 day VRRR in a similar calibrated fashion, and has also discontinued the government bond buying program (GSAP). We maintain that a barbell approach to fixed income portfolio construction remains a prudent way to navigate interest rate volatility over the next few years. Core of the fixed income portfolio should be at the short to medium term (3-5 years), complemented with long term (10 years) roll down high credit quality strategies to provide an optimum balance of yield and duration.

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