RBI Policy Expectation: Quantum Advisors

7 Feb 2022 , 08:30 AM

1. Change the stance: With the government well and truly accepting the mantle of reviving growth, the RBI no longer needs to prioritise growth over inflation. Their current stance of ‘accommodative policy for as long as necessary to revive growth’  needs to be changed. Given that the economy has recovered and does not need lower rates or higher liquidity, the MPC should change its monetary policy stance to Neutral. With oil prices above $90/brl and threatening to go higher, they should also mention that the MPC would now incrementally prioritise inflation and that the RBI should worry about financial stability over growth revival.
2. Hike the Reverse Repo Rate to 3.75%:  Given that the VRRR auctions are happening at 3.99%; close to the Repo rate of 4%, it is time to increase the reverse repo rate to 3.75% and narrow the LAF corridor to 25 bps. This will reduce the overnight and money market rate volatility. This move along with the change in stance to Neutral will also help the RBI to signal the operational policy rate back to the Repo rate of 4%.
3. Prepare the markets for repo rate hikes in the months ahead: Given that financial market conditions have already tightened, they should indicate the desire to keep system liquidity in a reasonable surplus to be able to manage the rate hiking cycle without too much disruption in the yield curve.
4. Clarify: Is ‘Stable evolution of the yield curve’ still a public good? Thus, should the markets expect OMOs, twist, G-SAP as a means to shape and manage the yield curve in a changed policy stance as well.

The author of this article is Arvind Chari — CIO , Quantum Advisors

The views and opinions expressed are not of IIFL Capital Services, indiainfoline.com