RBI Policy Preview: Key rates likely to remain unchanged, but will Reserve Bank calm bond market?

The Reserve Bank of India (RBI) has deferred the meeting of rate-setting Monetary Policy Committee (MPC), slated to take place on Monday, to Tuesday, February 8, 2022, after Maharashtra declared public holiday on February 7 to mourn death of legendary singer Lata Mangeshkar. The outcome of the meeting will be shared by the RBI on February 10, instead of a day prior earlier.  

RBI MPC meet deferred 

"With February 7, 2022 being declared a public holiday by the Government of Maharashtra under Section 25 of the Negotiable Instruments Act, 1881 as a mark of respect to Bharat Ratna Ku. Lata Mangeshkar, the MPC meeting has been rescheduled to February 8-10, 2022," the RBI said in a late evening statement on Sunday. 

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Key rates likely to remain unchanged 

Meanwhile, it is widely believed that the central bank will maintain the status quo around key policy rates.   "We expect the Monetary Policy Committee (MPC) to keep the repo rate unchanged and retain its accommodative stance in its forthcoming policy review," said Edelweiss in its RBI Policy preview.  

Revise repo rate may see a hike 

It though underlined that there is a good possibility of a 25bps hike in the reverse repo rate (currently at 3.35%) as part of normalisation of the policy corridor. 

The RBI has kept the key repo rate at 4 per cent since May 2020, an all-time low, even though bond yields have been heading north for many months now. 

The market has been expecting a 25 bps reverse repo tightening. Its assumption got cemented when the Budget announced a record borrowing plan -- gross borrowing at Rs 14.95 lakh crore and net borrowing of Rs 11.6 lakh crore (much higher than BofA estimates of Rs 13 lakh crore and Rs 9.6 lakh crore), said news agency PTI. 

There is a good possibility of a 25bps hike in the reverse repo rate (currently at 3.35%) as part of normalisation of the policy corridor. "This should work to push the money market rates higher," says Edelweiss report.   

Challenges before RBI 

It further says that the bigger challenge for the RBI is the 50bps rise in long-end rates since its last policy in December. Rise in global rates, spike in crude prices and higher market borrowing are clearly at play, it highlighted. 

Faced with multiple challenges – nurturing economic recovery, normalising liquidity, and adverse external environment making policy choices complicated, the central bank may now resort to raising the reverse repo rate, but commentary/guidance on long-end rates will be vital expects the brokerage.  

"With yields spiking, RBI’s challenge mounts. On one hand, it might be uncomfortable with a spike in yields, but on the other, it is trying to normalise excess liquidity. Navigating this dilemma becomes even more challenging with the Fed/ECB on a tightening path. Thus, RBI’s commentary around these issues will be keenly watched," observed the brokerage.  

"Prepare the markets for repo rate hikes" 

Arvind Chari – CIO , Quantum Advisors – is of the view that the RBI should 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," he said. 

Repo rate vs reverse repo rate 

Repo rate is the rate at which banks borrow money (by selling their securities) from RBI to maintain liquidity when they face a shortage of funds.  Reverse Repo Rate is opposite to that of Repo rate as in this case, the RBI borrows money from banks when there is excess liquidity in the market to restrict borrowings power of investors.