Global Economy

Expect non-interest rate measures from RBI this week

The Reserve Bank is likely to focus on non- interest rate measures for the sixth time this week when the MPC meets. By announcing a lower than expected government borrowing programme, the government has done its bit by helping push down yields. Besides, the 250 bps hike in policy rates is not fully transmitted by the commercial banks since the Reserve Bank of India started raising policy rates from May 2022 to combat rising inflation. The focus will be on liquidity measures this time.
With a lower-than- expected fiscal deficit, government gross borrowing is expected to decline by 8.4% year-on-year in 2024-25. ” This provides support to long-end bond yields, especially in the context of India’s impending bond index inclusion by Jun-24. As such, a decrease in government borrowing will improve the liquidity situation” said Morgan Stanley in a note. In terms of impact on rates, yields on ten year government bonds fell by at least 10 bps (one basis point is 0.01 percent) in two days since the budget announcement on February, One.
RBI is expected to keep the policy repo rate unchanged at 6.50% at the February 8 policy meeting, continue with hawkish guidance, and reiterate the 4% inflation target, according to Goldman Sachs. ” We further expect the RBI to retain its tight liquidity stance (as signaled by the comment that they will “remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth” said Santanu Sengupta, chief India economist at Goldman Sachs.
As for inflation, food inflation could be sticky nearing 7 percent, though core inflation is well within the RBI target of 4 percent. Its attempt to manage inflation expectations could be through liquidity measures. ” While the RBI’s MPC is likely to keep the repo rate unchanged on 8 February, we expect the first steps to address tight frictional liquidity and a more active discussion on removing the tightening bias from the guidance” said Sonal Varma and Aurodeep Nandi of Nomura’s Asia Economics team. ” In our base case, we expect 100bp of rate cuts, starting from August, with risks skewed towards earlier easing in June”.

Also, the transmission of policy rates in India has trailed the pace of rate hardening by its central bank, which sought to restrain inflation by cumulatively raising the repurchase rates by 250 basis points since the summer of 2022. The transmission ranged between 107 basis points and 228 basis points over this period, although the Reserve Bank of India (RBI) halted the rate increases early 2023.

The weighted average lending rate (WALR) on fresh rupee loans rose 146 basis points in the current rate hike cycle. The WALR on outstanding rupee loans rose 107 bps. The weighted average domestic term deposit rate (WADTDR) on fresh rupee term deposits increased 228 bps in the current cycle, while the weighted average domestic term deposit rate (WADTDR) on outstanding rupee term deposits rose 184 bps.” With banks raising both deposit and lending rates, the pace of monetary transmission is picking up again,” said Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays. “Hence, the RBI may see little need to tighten liquidity incrementally either through signaling or outright actions.”

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