NEW DELHI: The Reserve Bank of India (RBI) is unlikely to tinker with policy rates when its committee to decide on rates sits together to take a call on interest rates on Friday. This means borrowers would continue to pay interest at record low rates, even as depositors continue to suffer.
However, the central bank may signal the end of its easy liquidity policy. The RBI’s Monetary Policy Committee (MPC) on Friday is likely to maintain the status quo on policy rates for the eighth time in a row. Repo rate, or the short-term lending rate, is currently set at 4%, while the reverse repo rate is held at 3.35%. The MPC last revised rates on May 22, 2020 in an off-policy cycle to stir demand and aid growth.
The Friday meeting instead could signal liquidity normalisation, provide forward guidance towards narrowing the repo corridor, setting the ground for a reverse repo rate hike in December. The central bank might as well wind down its special scheme to purchase government securities (G-SAP).
Currently, the core liquidity surplus is about Rs 12 lakh cr, while overnight liquidity surplus is Rs 6.2 lakh cr. “There can be a natural reduction in liquidity if RBI decides to use its forex reserves against any rapid rupee depreciation. Festive demand for cash could also lead to a reduction in overnight liquidity. Some fear a withdrawal of the G-SAP programme. While there’s a chance for reduction in the size of the programme, a sudden pause may not be warranted,” Indranil Pan, Chief Economist, Yes Bank said.
The anticipated hike in the reverse repo rate, citing the higher cut-off at the latest VRRR (variable reverse repo rate) auctions shouldn’t be read as the road to rate hikes. As Deputy Governor Dr Michael Patra has pointed out, VRRR isn’t a signal for lift-off of interest rates, instead it is an attempt by RBI to keep the operative rate within the corridor on a sustained basis, before guiding for a cut in the size of the rate corridor.
Anaylsts expect repo rate is likely to regain its status. “The October policy will be the perfect window to outline its thoughts on normalisation especially since RBI will certainly want to avoid any sudden tightening,” noted Suvodeep Raskhit, Senior Economist, Kotak Institutional Equities.