RBI MPC: Indian Central Bank likely to hold repo rate steady, raise reverse repo

India`s central bank is expected to hold its repo rate steady on Thursday but several economists are expecting an increase in the reverse repo rate as part of a process to reduce surplus liquidity poured into markets earlier in the pandemic.

The three-day meeting of the Reserve Bank of India`s monetary policy committee is set to end on Thursday, having been delayed after Maharashtra state declared a day of mourning on Monday following the death of legendary singer Lata Mangeshkar.

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A Reuters poll of economists forecast that the RBI would raise the reverse repo rate - the rate at which it borrows from banks - to 3.55% from 3.35%, narrowing the corridor between it and the repo rate to 45 bps.

The repo rate is expected to go up by 25 bps at the subsequent meeting in April according to a little over half the respondents while two-thirds expect one more similar sized increase later in the year.

"After months of incremental moves, we think the RBI will take a decisive step towards policy tightening by hiking the reverse repo rate at the conclusion of its MPC meeting," said Shilan Shah, senior India economist at Capital Economics.

The MPC has held the key repo rate at record lows since May 2020 and reiterated time and again that it will remain supportive of growth and keep its stance accommodative until economic recovery is firmly entrenched.

However, market participants believe it is time for the RBI to shift focus back to controlling inflation and for it to at least change its stance to `neutral` from `accommodative` at the upcoming review.

Retail inflation accelerated to a five-month high of 5.59% in December from a year earlier, while wholesale price-based inflation, a proxy for producer prices, marginally eased to 13.56%, but remained in double-digits for nine straight months.

Still, economists are split over whether the RBI will be comfortable changing its stance so soon after a government budget that spooked bond markets by planning for record high borrowing and a higher-than-expected fiscal deficit.

"Focus is likely to return to financial market stability amidst a challenging global policy backdrop. Bond yields have risen sharply following a high borrowing program for FY23, with market participants counting on central bank`s support to quell the pace of rise," said Radhika Rao, economist at DBS Bank.

"A 20 bps reverse repo rate is a possibility at this week`s meeting, but the change in stance might be scheduled for 2Q," she added.