RBI may deflate hype around reverse repo rate hike: SBI report
The Reserve Bank of India (RBI) can deflate the hype around the rise in reverse repurchase agreements in monetary policy by explaining the virtues of using reverse repo switching as a pure liquidity tool, not a tool. rate, according to the State Bank of India’s “Ecowrap” economic research report.
He stressed that it was prudent to delay normalization measures in the current situation, which would also allow time for the economic recovery to strengthen further.
“We believe discussions of a reverse repo rate hike at the Monetary Policy Committee (MPC) meeting may be premature, as the RBI was largely able to cut the hallway without the noise of the hikes. rate and the resulting market cacophony, ”said Soumya Kanti Ghosh. , Group Chief Economic Advisor, SBI.
The reverse repo rate is the interest rate that banks charge for parking excess short-term liquidity with the RBI.
Section 45Z (3) of the Amended RBI Act of 2016 clearly states that “the monetary policy committee shall determine the policy rate required to achieve the inflation target”.
Ghosh pointed out that nowhere in the MPC’s mandate is there any reference to its role in liquidity management, which remains internal to the functioning of the Bank in accordance with its policy. Thus, the RBI is not obliged to act on the repo rate only in MPC.
Furthermore, the change in the repo rate is an unconventional policy tool that the RBI effectively deployed during the crisis when it moved to a floor instead of the hallway.
In this regard, the report refers to observations by Goodhart (2010) that the width of the political corridor acts as an independent instrument for the central bank in a crisis and an asymmetric corridor is a logical result.
According to the SBI’s economics research department, the central bank can (for whatever reason) provide any amount of additional liquidity without pushing short-term money market rates below the policy rate.
“Thus, the interest rate can be set to achieve monetary targets, while the amount of liquidity in the banking system can play the role of stabilizing financial markets. Since the pandemic, the RBI has done exactly this balancing act, and the pandemic is not over yet! said Gosh.
Referring to the US Fed indicating to speed up the bond reduction program, thus ending it sooner than expected, the report observes that rate hikes are also expected earlier than expected as inflation is no longer being considered. as a transient.
“Unless Omicron turns out to be more fatal than the Delta variant, this in turn would imply a strengthening of the dollar and depreciation pressures for the rupee. So RBI should seek multiple goals, ”the report said.
Ecowrap noted that the next monetary policy comes against the backdrop of the global Omicron fear, which we are still trying to unravel.
However, the good thing is that India has now vaccinated 125 crores of people which could have enabled the country to better prepare for the future as the gap between wave 1 and wave 2 was only 2 months.
“… The pandemic has also made its way through the population, resulting in greater herd immunity …”, the report said.
Ghosh noted that the RBI has made calibrated progress towards liquidity normalization since the October policy with the amount parked in the overnight fixed reverse repo declining to 2.6 lakh crore from 3.4 lakh crore. in the pre-October policy
The smaller increase in currency in circulation, as more and more people now use digital payment methods, has also contributed to the accumulation of excess liquidity.
The report says the RBI also largely met its target of pushing up short-term rates with a 3-month Treasury bill rate that was below the reverse repo for most of August now at 3.52%, taking into account the impact of the variable reverse pension rate. Likewise, 6-month and 1-year Treasury bill rates have risen 20 to 30 basis points since the last MPC.