RBI MPC: Arvind Chari of Quantum Advisors sees recalibration in policy stance; lists 3 expectations from February monetary policy announcements

The Monetary Policy Committee of the Reserve Bank of India (RBI) will begin its three-day policy meeting on Monday and will announce the decisions on key policy rates on Wednesday - 9 February 2022. This is what Arvind Chari, Chief Investment Officer (CIO) at, Quantum Advisors expects from the Central Bank. 

Chari expect the RBI and the MPC to re-calibrate its monetary policy stance in its meeting next week. “With the government well and truly accepting the mantle of reviving growth, the RBI no longer needs to prioritise growth over inflation. Their current stance of ‘accommodative policy for as long as necessary to revive growth’ needs to be changed,” he said.   

He lists out his expectations from the banking regulator: 

1. Change the stance: Given that the economy has recovered and does not need lower rates or higher liquidity, the MPC should change its monetary policy stance to Neutral. With oil prices above USD 90/brl and threatening to go higher, they should also mention that the MPC would now incrementally prioritise inflation and that the RBI should worry about financial stability over growth revival. 

2. Hike the Reverse Repo Rate to 3.75 percent:  Given that the VRRR auctions are happening at 3.99 per cent; close to the Repo rate of 4 per cent, it is time to increase the reverse repo rate to 3.75 per cent and narrow the LAF corridor to 25 bps. This will reduce the overnight and money market rate volatility. This move along with the change in stance to Neutral will also help the RBI to signal the operational policy rate back to the Repo rate of 4 per cent. 

3. Prepare the markets for repo rate hikes in the months ahead: Given that financial market conditions have already tightened, they should indicate the desire to keep system liquidity in a reasonable surplus to be able to manage the rate hiking cycle without too much disruption in the yield curve. 

The CIO also wants the central bank to clarify if ‘Stable evolution of the yield curve’ still a public good and should the markets expect Open Market Operation (OMOs), twist, G-SAP as a means to shape and manage the yield curve in a changed policy stance as well.