NEW DELHI: As the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) started its deliberation on Monday, most analysts believe that despite uncertainties due to the new Covid-19 variants, the MPC can no longer overlook the inflationary pressures.
It would, therefore, have to change its policy stance, and increase the reverse repo rate — interest rate that banks receive for parking their funds with RBI — by 15-20 basis points.
Though, they do not see a repo rate hike before mid 2022.
Experts believe that the gap between repo rate (currently at 4%) and reverse repo rate (at 3.35%) is much more than the usual 25 basis points (bps), and therefore, the MPC may announce the first tranche of 15-20 bps reverse repo rate hike on Wednesday, Dec 8.
A reverse repo rate hike would encourage banks to park funds instead of making it available for lending. This would lead to reduction of excess liquidity from the system.
The MPC may restore the width of the repo and reverse repo rate corridors to the usual 25 bps, by gradually hiking the latter, says Siddhartha Sanyal, chief economist in Bandhan Bank.
He added that we are close to upticks in reverse repo rate - in the first tranche, the uptick can be just a token 15 bps.
Nomura, however, see a more knee-jerk reaction by MPC as it maintains its base case view that the RBI will normalise the reverse repo rate fully by 40 bps as economies are learning to live with the virus, GDP is back to pre-pandemic levels, and core inflation is near 6%.
The experts, however, feel that the repo rate cut is still two quarters away. Pankaj Pathak, fund manager, Fixed Income, Quantum Mutual Fund, sees repo rate cut in the latter part of 2022.