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Four things to watch out for from RBI policy today

Majority of economists are expecting RBI to keep policy rates unchanged, while maintaining an accommodative stance. However, economists say that RBI could hint at gradual policy normalization, setting the stage for a reverse repo rate hike in December. (MINT_PRINT)Premium
Majority of economists are expecting RBI to keep policy rates unchanged, while maintaining an accommodative stance. However, economists say that RBI could hint at gradual policy normalization, setting the stage for a reverse repo rate hike in December. (MINT_PRINT)

  • The market is expecting Reserve Bank of India to provide a roadmap on unwinding excess liquidity of 12 trillion through long-term variable rate reverse repo auctions

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MUMBAI : Reserve Bank of India (RBI) governor Shaktikanta Das on Friday will announce the August bi-monthly monetary policy statement at 10 am, which will be followed by a press conference. The statement will follow the three-day review meeting of the six-member Monetary Policy Committee, or the rate-setting panel, of RBI, headed by Das, had begun Wednesday.

Liquidity normalization

The market is expecting Reserve Bank of India to provide a roadmap on unwinding excess liquidity of 12 trillion through long-term variable rate reverse repo (VRRR) auctions. With RBI resuming 14-day VRRR auctions from August, and announcing several such auctions of 3-7 day tenor in recent weeks, a majority of economists expects an increase in VRRR auction size, and also longer tenor VRRRs of 28 days or 56 days. The recent cut-off at the latest seven-day VRRR auction at 3.99%, closer to the repo rate is also another reason why the bond market is interpreting it as a normalization signal. A longer term VRRR auction is conducted depending on RBI’s prognosis of the market and for how long it wants to keep the liquidity out of the system. With liquidity surplus touching 8 trillion, bond market expects RBI to taper the bond buying programme under its government securities acquisition programme (GSAP). Through this, the RBI has already purchased 2.2 trillion ( 1 trillion in Q1 and 1.2 trillion in Q2) worth of bonds from the secondary market, directly injecting liquidity into the system.

Rate Stance

Majority of economists are expecting RBI to keep policy rates unchanged, while maintaining an accommodative stance. However, economists say that RBI could hint at gradual policy normalization, setting the stage for a reverse repo rate hike in December.

Inflation

On the inflation front, RBI had made upward revisions in the previous policies to 5.7%. Headline CPI has been trending lower at around 5%. That said, economists are divided over whether RBI may revise its forecast lower, given the recent spike in crude oil prices. Some economists are expecting RBI to lower inflation forecast by 30-40 basis points and will state caution on upside risks via imported inflation and its pass-through.

Growth

RBI is expected to sound optimistic on growth recovery. Rating agency Moody’s had hiked the sovereign credit rating outlook to stable from negative, citing improvement in the financial sector and faster than expected economic recovery. Economists are expecting RBI’s FY22 real GDP growth forecast to be maintained at 9.5% year on year.

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