RBI Policy: Accommodative to Qualified Accommodation

RBI has announced that it will continue the accommodative stance of the policy and will gradually bring down  the level of accommodation over a period of time. In other words, the RBI “decided to remain accommodative  while focusing on withdrawal of accommodation to ensure that inflation remains within the target going  forward, while supporting growth.” The Repo Rate has been left unchanged at 4%, and the Reverse Repo rate  has been raised by 40 basis points, from 3.35% to 3.75%, thereby initiating the process to re-establish the  Repo corridor of 50 bps.

The high oil prices, metals prices and the currency depreciation in emerging markets remain challenges to  growth and inflation management. RBI has revised the growth projections lower and inflation projections  higher in view of the factors mentioned above. Growth may be lower at 7.20% for 22-23, and inflation may be  higher at 5.70% (4.50% earlier). The central bank takes cognizance of the peculiar conditions against which  these forecasts have been made. “It may, however, be noted that given the excessive volatility in global crude  oil prices since late February and the extreme uncertainty over the evolving geopolitical tensions, any  projection of growth and inflation is fraught with risk and is largely contingent upon future oil and commodity  price developments.”

An interesting development is that the RBI has introduced Standing Deposit Facility (SDF) as the bottom or  floor of the LAF facility, and the Marginal Standing Facility (MSF) as the upper end of ceiling of the corridor,  the former will be at 25 basis points below the policy rate, and the latter at 25 bps above the policy rate. These  two facilities can be availed of entirely at the discretion of the banks. With SDFs the collateral constraint has  been done away with.

With the introduction of Standing Deposit Facility (SDF), the RBI has increased the tools available at its  disposal to manage liquidity. Even though the reverse repo rate has been hiked from 3.35% to 3.75%, the rate  of 3.35% has still been retained for fixed rate reverse repo (FRRR) transactions. The FRRR will remain part of  the RBI’s toolkit and its operation will be at the discretion of the RBI for purposes specified from time to time.  Accordingly, access to SDF and MSF will be at the discretion of banks, while repo/reverse repo, OMO and  CRR will be at the discretion of the RBI. 

Higher inflation along with a high level of government borrowing is a clear signal for much higher rates. But  the potential for lower growth may restrict the upward movement of official policy rates, but the market rates  are bound to be in an upward trajectory. The target levels, indicated in our earlier FinSights and the latest  Navigator, for the 10 Year benchmark stays at 7.15% and 7.35%.  

The views shared on the likely policy outcomes and yield movements. 

The ten-year benchmark yield has once again touched the 6.90% level a second time, and it may try to push  through its way to higher levels. But the immediate target may be 7.15% and 7.35%. A strong support level  may be 6.60%. It may be pointed out here that market yields both at the short end and the long end have  moved up in response to expectations on potentially higher inflation and impending changes in official policy.  (Emkay Navigator, March, 2022) 

The US Fed has changed its stance accordingly and even hiked the fed funds rate by 0.25%, for the first time  since December 2018. The Indian benchmark 10yr g-sec yield has been trading in the range of 6.7% to 6.9%  since the budget, but that has been on the back of no fresh supply and a supportive policy stance. As the fresh  supply initiates with the backdrop of high inflationary risks and expected change in the policy stance coupled  with a possible policy action, the stated 10-year yield range may be broken on the higher side.  

(FinSights, Government Borrowing Program, March 1, 2022) 


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