RBI may increase reverse repo by 20-25 bps next month, say economists

The Reserve Bank of India (RBI) may increase the reverse repo rate by a token 20-25 basis points next month as part of its monetary policy normalisation process, according to economists.

Reverse repo rate is the interest banks receive for parking surplus liquidity with RBI. Currently, this rate is at 3.35 per cent. One basis point is equal to one-hundredth of a percentage point.

The reverse repo rate was cut thrice in calendar year (CY) 2020: from 4.9 to 4 per cent on March 27, 2020, from 4 per cent to 3.75 per cent on April 17, 2020, and from 3.75 to 3.35 per cent on May 22, 2020.

Rahul Bajoria, Director and Chief Economist for India and the Antipodeans, Barclays, said: “We expect the RBI to increase the reverse repo rate by a token 20-25 basis points (bps) at the December policy meeting. However, an increase in the repo rate is likely to only take place in April, 2022.”

Repo rate is the interest banks pay to the RBI for drawing liquidity to overcome short-term mismatches.

This rate was reduced in two stages in CY2020: from 5.15 to 4.4 per cent on March 27, 2020, and from 4.4 to 4 per cent on May 22, 2021.

“With evidence that the economic recovery is well entrenched, policy normalisation could be underway. The RBI has already begun withdrawal of extraordinary stimulus by shelving its bond-purchase programme and stepping-up absorptions through the variable-rate reverse repo rate,” Bajoria said.

According to a Goldman Sachs (GS) economic research report, the RBI is currently in stage 2 (liquidity tightening) of the four-stage monetary policy normalisation process that began with ‘less dovish’ comments from monetary policy committee (MPC) members and will end with repo rate hikes.

“In our view, the RBI will likely move to stage 3 (reverse repo hike) by the end of this year, and start hiking repo rates from Q2 2022. We expect a cumulative 75 bps of repo rate hikes in 2022,” the report said.

GDP growth

Barclays assessed that the Indian economy is still on track to grow in double digits for FY 21-22 at around 10 per cent, along with rapid growth in nominal activity given higher inflation as well.

Strong fiscal and monetary support, along with a rapid improvement in the pace of vaccination has helped nurture a swift economic recovery, it added.

GS expects GDP growth in India to accelerate to 9.1 per cent y-o-y in 2022, from 8 per cent in 2021, post a sharp 7 per cent contraction in 2020.

“We expect consumption to be an important contributor to growth in 2022, as the economy fully re-opens driven by a notable improvement in the virus situation and adequate progress on vaccination.

“We also expect government capital spending to continue, see nascent signs of a private corporate capex recovery, and a revival in housing investment,” the report said.