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The Reserve Bank of India (RBI) is expected to raise the repo rate in two consecutive policy meetings, while absorbing an additional Rs 2 lakh crore of liquidity, as per a report by ICICI Bank.
The Monetary Policy Committee (MPC) unanimously raised the repo rate by 25 basis points to 5.5 per cent and shifted its policy stance from neutral to calibrated tightening on Wednesday. The policy statement clarified that the revised stance signals the likely direction of future rate decisions, whether a hike or a pause, rather than the extent of further increases. The term calibrated suggests a more data dependent approach, the lender noted in its report. As per the report, the liquidity surplus is expected to narrow under the RBIs calibrated tightening stance as headline inflation approaches the upper end of the central banks tolerance band. It further highlighted that the central bank has been using sell-buy foreign exchange swaps, open market operations (OMOs) and spot market interventions to manage excess liquidity, and these measures are likely to continue. We expect these tools to continue to be used even as sell-buy swaps have led to distortion in forward premia moving the most when WACR has been generally lower than policy rate and most other short-end rates have fallen, it said. It further noted, based on current liquidity projections, the RBI may need to inject around INR 2 trillion into the banking system to keep surplus liquidity at 0.51% of NDTL. This could be done through foreign exchange (FX) operations or open market operations (OMOs). Such a move would also allow domestic interest rates to rise in line with the upward trend in global bond yields. Apart from this, the central bank has also increased its FY27 GDP growth forecast to 7.1 per cent from 6.7 per cent and its inflation projection to 5.2 per cent from 5 per cent. For FY28, the growth is projected at 7 per cent, while inflation is expected to remain at 5 per cent. Further, inflation has risen in recent months, largely driven by supply-side pressures from food and energy rather than stronger demand. At the same time, inflation diffusion indices also indicate that price pressures remain concentrated in select categories. Additionally, while nearly half of food items are recording inflation above 4 per cent, only about one-fifth of items in the core inflation basket have crossed that level. Given the underlying nature of inflation and trajectory in H2FY28, we expect terminal repo rate at 6% for now with back-to-back increase in repo rate over the next two policies, it said. (ANI)
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