The delivery of 0.5% hike in Reverse Repo rate and 0.25% hike in the Repo was indeed a master stroke. The majority of the market participants were in favour of a 0.25% hike in both policy rates but some were voicing the need to hike Reverse Repo rate by 0.5% to keep the shorter end of the yield curve up as and when Reverse Repo becomes operative. RBI Governor chose to mix both expectations which came as a surprise to all participants.
The decision has a mix of popular and prudent approach with intention to manage demand side inflationary pressures till emergence of signs of reversal expected in the second half of current financial year. The stance of RBI seems to be negative on inflation and neutral on growth momentum, hence the priority to address inflationary pressures ahead of growth concerns. The uncertainty however is on liquidity and the timing of call money moving into LAF corridor to shift the operating rate to Reverse Repo.
RBI cannot afford to stay as a lender for extended period of time after impounding 31% of Bank's NDTL. The signal for quick reversal into LAF corridor is given through the hike in Reverse Repo Rate to bring the element of logic for the need to hike Reverse Repo Rate.
Over all, the surprise was not a harsh one but gives the signal that call money rate would move into 4.5-5.0% sooner than later to dilute the impact from rate hike actions with 10Y bench mark yield steady at 7.60-7.75%. It is a welcome decision both for policy makers and various stake holders of the economy.
The Author is Romesh Sobti, MD & CEO, IndusInd Bank
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