Financial basis

ET poll: reverse repo rate could be increased by 15 to 40 basis points

The Reserve Bank of India (RBI) could raise the reverse repo rate by around 15 to 40 basis points while crafting measures to support the Union budget that spur growth with greater investment and record borrowings on the market.

An ET poll of 22 banks, funds and financial institutions showed the central bank’s Monetary Policy Committee (MPC) would assess inflation risks that could cloud India’s growth outlook amid rising prices crude and local interest rates.

The monetary policy committee postponed its bi-monthly review meeting to February 8-10 on Sunday, citing a public holiday due to the death of singer Lata Mangeshkar.

The reverse repo rate is the interest banks earn by parking their excess funds with the RBI.

Move to support tax borrowing plan

The repo rate currently stands at 3.35%. The 4% repo rate is what the central bank earns by lending to banks.

“This time, monetary policy should appeal to growth especially as the budget is optimistic about the same,” said Madan Sabnavis, chief economist at Bank of Baroda. “This position will be a prerequisite for the launch of the liquidity normalization plans.”

“A likely rise in reverse repos will be in line with the supportive fiscal borrowing plan, as an increase in interest costs is already factored in,” he said.

While nearly three-quarters of survey respondents expect the reverse repo rate to rise, about half are betting on a change in policy direction. The central bank’s interest rate policy is now “accommodative”. Any change will make it “neutral,” a precursor to sustained rate increases.

A shift in stance is also seen in line with the central bank normalizing liquidity in the system which now stands at Rs 7.06 lakh crore from Rs 5.75 lakh crore at the end of January.

“Growth has yet to pick up for small businesses across the country, which was evident in priority budget areas by extending the warranty period by one year,” said A Balasubramaniam, Managing Director of Aditya Birla. Mutual Fund. “The RBI needs to be convinced of growth and a rising inflation path as it cannot reverse its policy decisions once it is raised.”

“It will likely change its stance to neutral first to prepare markets for a long rate trip north,” he said.

New Delhi has extended the emergency credit guarantee scheme to give a boost to bank lending as lenders increasingly find comfort in the viability of businesses.

Increase in government borrowing

North Block aims to borrow Rs 14.95 lakh crore from the debt market in 2022-2023. The estimated figure is much higher than the average market expectation in the range of Rs 12-12.50 lakh crore.

Bond investors rushed to sell sovereign paper anticipating an increase in the supply of securities. The yield on benchmark bonds climbed as high as 28 basis points, dragging prices lower last week.

“MPC should focus on the disconnect between market rates and policy rates, the outlook for inflation, especially with rising oil prices,” said Soumyajit Niyogi, associate director at India Ratings. “Furthermore, RBI should ensure smooth and uninterrupted government borrowing for growth and financial market stability under a multi-purpose framework.”

Last Friday, the central bank had to cancel bond auctions in part for a net amount of Rs 13,494 crore. He did not accept higher bids for two series of papers with residual maturities of three to four years.

The RBI appears to be on high alert for any sudden jumps in federal funding costs, although the Union budget has already estimated a 15.48% increase in interest charges over the next financial year.

Consumer prices rose 5.59% year-on-year, hitting a five-month high in December last year. However, they remain within the range of the RBI tolerance level of 4-6%.

The price of Brent is at 93 dollars per barrel against 80.87 dollars a month ago.