RBI may follow Fed on rate hike

with him ₹2 trillion seven-day variable rate reverse repo (VRRR) cutoff rate, coming in at 3.99% in the auction held on September 28, has raised questions as to whether this is an indication that the RBI is considering introducing reverse repo rate hikes in October policy itself. Will do . We will be pleasantly surprised if RBI goes for it, but we are of the view that reverse repo liftoff is more likely to happen in December policy rather than October policy. We think the RBI will wait to see if the Covid-19 cases pick up after the festive season in October, and if the risk is not manifested, the central bank will take steps to start increasing the reverse repo rate from the December policy. can be ready.

Meanwhile, the October policy would, in our view, be an appropriate time period to resort to sustainable liquidity absorption through the use of longer-term VRRR. With the resumption of 14-day VRRR auctions by RBI from August and the announcement of higher VRRR for a period of 3-7 days in recent weeks, the next logical step is to take longer term VRRR (28-day or 56-day) in the upcoming period. -day) to announce liquidity absorption. Policy. we expect ₹2 trillion long-term VRRR to absorb liquidity on a sustainable basis. RBI may also reduce the G-SAP purchase volume for the October-December and January-March quarters. ₹75,000 crore each quarter, if RBI decides to maintain the same ratio of G-SAP purchases to net market borrowings during 1HFY22), in our view, from ₹1.2 trillion is committed for July-September, and will likely operate as “twist operations” so as not to further add to the large liquidity surplus.

We feel that the two 20 basis point (bps) reverse repo rate hikes in the December and February policies, instead of one 40 bps hike in one go, either in the December or February policy, would be the ideal pace of indexing. We expect the accommodative monetary stance to remain unchanged in December even as the RBI will increase the reverse repo rate by 20 bps to 3.55% by the end of 2021. If India manages to avoid the third wave, the accommodative stance in February’s policy will be changed to neutral, along with another 20 bps hike in reverse repo to bring it to 3.75%. Thereafter, we expect the RBI to gradually increase the repo rate by 50 bps in 2022, 50-75 bps in 2023 and 25 bps in 2024. The terminal repo rate is expected to reduce by 5.50% in the post-Covid environment.

There are essentially four downside risks to growth: a resurgence of the third wave in the coming months; Global oil and energy prices remain high, resulting in a negative impulse for private consumption expenditure growth; Slowdown in export momentum due to slowdown in global economic activity; and the catastrophic medium-term effects of the health crisis, preventing private consumption and investment from returning to pre-pandemic trends. Despite these risks, we expect the RBI’s FY22 real GDP growth forecast to be maintained at 9.5% year-on-year (our forecast remains the same). Meanwhile, the RBI has revised its FY22 CPI inflation forecast to 5.1-5.2% (our own estimate of 5.2%), as a result of lower-than-expected CPI prints in the past few months and moderation in vegetable prices in September. can. , currently averaging 5.7%. Despite the lower CPI, the core CPI is expected to remain sticky at around 6% for the next six months.

Kaushik Das is the Chief Economist of India, Deutsche Bank.