RBI should follow Fed on rate hikes
We expect the Monetary Policy Committee (MPC) to keep all policy rates unchanged during the next monetary policy on October 8. Just as the US Fed has signaled to the market that the reduction in asset purchases should not be interpreted as a timing signal for rate hikes, we believe the Reserve Bank of India (RBI) will also communicate the same in the next monetary policy. In other words, the RBI will gradually begin the process of normalization in October policy, but will do so while keeping the accommodative monetary stance unchanged, thereby decoupling its liquidity-absorbing actions from a timing signal for a potential increase in the key repo rate in the short term.
With the ??The seven-day $ 2,000 billion variable-rate reverse repurchase (VRRR) cut-off rate was 3.99% in the September 28 auction. . We’ll be pleasantly surprised if the RBI opposes it, but we think a reverse repo take-off is more likely in the December policy than in the October policy. We believe RBI will wait to see whether or not covid-19 cases increase after the festival season in October, and if the risks do not manifest, then the central bank may be ready to start raising the uptake rate. reverse pension from the December policy.
The October policy, in the meantime, will be an appropriate time to resort to a sustainable absorption of liquidity through the use of a longer term VRRR, in our view. With RBI resuming 14-day VRRR auctions starting in August and announcing more VRRRs for 3-7 days in recent weeks, the next logical step is to announce the cash absorption. via a longer VRRR duration (28 days or 56 days) in the next policy. We are waiting ??2 trillion VRRR in the longer term to absorb liquidity in a sustainable way. The RBI will also likely reduce the purchase amount of G-SAP for the October-December and January-March quarters (it should be around ??75,000 crore each quarter, if RBI decides to maintain the same proportion of G-SAP purchases to net market borrowing for 1HFY22), in our opinion, from the ??$ 1.2 trillion committed for July-September, and will likely lead it in the form of “twist trades,” so as not to add more to the large excess liquidity.
We believe that two 20 basis point (bps) hikes in reverse repo rates in December and February will be the ideal sequencing pace, rather than making a 40 bps hike all at once, either in the policy of December or February. We expect accommodative monetary policy to also remain unchanged in December, even if the RBI increases the repo rate by 20 basis points to 3.55%, by the end of 2021. If India succeeds in To escape a third wave, the accommodative stance will likely be changed to become neutral in February policy, along with another 20 basis point hike in the reverse repo to take it to 3.75%. Thereafter, we expect the RBI to gradually increase the repo rate by 50 basis points in 2022, from 50 to 75 basis points in 2023, and an additional 25 basis points in 2024. The repo rate final pension should be less than 5.50% in the post-covid environment.
There are basically four downside risks to growth: the resurgence of a third wave in the coming months; global oil and energy prices remain high, creating a negative impetus for the growth of private consumption expenditure; slowdown in export dynamics driven by a moderation in global economic activity; and the medium-term scarring effects of the health crisis, preventing private consumption and investment from reverting to pre-pandemic trends. Despite these risks, we expect the RBI’s FY22 real GDP growth forecast to be held at 9.5% year-on-year (our forecast is the same). Meanwhile, the lower than expected CPI (consumer price index) in recent months and the fall in vegetable prices in September will likely cause RBI to revise its CPI inflation forecast for fiscal 22 at 5.1-5.2% (our own estimate is 5.2%), averaging 5.7% now. Despite a weaker CPI, the core CPI is expected to remain stable around 6% over the next six months.
Kaushik Das is the Chief Indian Economist at Deutsche Bank.
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