Tag: reverse repo

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

Banking & Finance

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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.

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Bank loans do not reflect credit risk adequately as RBI chases growth, BFSI News, ET BFSI

Banking & Finance

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The period of extended surplus liquidity is already witnessing fierce pricing wars across banks, some of which may not reflect credit risk adequately.

“However there is the risk of an Asset Liability mismatch if the liquidity is withdrawn quickly. As of now, the inflation numbers may not warrant such a decision from RBI, but if core inflation persists in the current range of 6% or above, that might act as a hindrance to continued liquidity abundance,” according to the State Bank of India’s economic research report Ecowrap.

The industry is replacing its long-term debts by very low-priced CP/working capital demand loan (ECDL) and this will obviously act as an enabler once the investment cycle revives

Margin pressure

Banks are now facing significant margin pressures despite surfeit of liquidity in the banking system, it said.

A back of envelope estimate suggests that the core funding cost of the banking system that includes cost of deposits, negative carry on Statutory Liquidity Ration (SLR) and Cash Reserve Ratio (CRR) and Return on Assets is currently at 6 per cent, while the reverse repo rate is at 3.35 per cent. Additionally, if the cost of provisions is added to the core funding cost, the total cost comes to around 12 per cent, the report said.

Credit risk

The report cited the example of 15 years loans, which are being priced at even lower than 6 per cent, linking with repo / treasury bill rates. It said that 10-year Government Security (G-Sec) is currently trading at 6.2 per cent and by the current pricing trends this could even gravitate towards 6 per cent again.

This anomaly not only negates the concept of tenor premium but may create a material risk with regard to sustainability of such rates in long term, on which borrowers and banks are basing their financial calculations, it said, adding that the only good thing is that such pricing war is mostly restricted to AAA borrowers.

According to the report, three year term loans are being quoted at close to 4 per cent repo rate and seven year term loans for borrowers below AAA are also quoting a risk premium of 15-20 basis points over the 10 year rates. Working Capital Loans (WCL) are currently being quoted at a notch above reverse repo rate at 3.35 per cent.

The report said that the concept of normally permitted lending limit (NPLL) for specified borrowers, meant to nudge them to move towards corporate bonds market, may lose its importance.

CP market

Ghosh observed that the commercial paper (CP) market is also witnessing significant churn with banks now almost absent.

Non-Banking participants like mutual funds who do not have access to RBI Reverse Repo window are creating pricing pressure in CP market as they are sometimes quoting below RBI reverse repo rate.

The CP market reflects the huge pricing gap between better and lower rated borrowers, it said.



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RBI keeps rates unchanged to support growth

Banking & Finance

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The Monetary Policy Committee of the Reserve Bank of India has decided to maintain status quo on key policy rates.

“The MPC took stock of the evolving macroeconomic and financial conditions and the impact of the second wave of Covid on the economy. Based on its assessment, the MPC voted unanimously to maintain the status quo on repo rates and maintain an accommodative stance for as long as possible to revive growth,” said RBI Governor Shaktikanta Das on Friday after the meeting of the MPC.

Also read: Monetary policy must remain accommodative

The policy repo rate remains unchanged at 4 per cent while the reverse repo rate is at 3.35 per cent.

The move comes amidst expectations of slowing growth after the second surge of the Covid-19 pandemic and local level lockdowns that have impacted economic activity. However, inflationary risks persist.

 

The RBI had kept key interest rates unchanged at the last MPC meeting held in April.

The RBI, in its Annual Report 2020-21, had also said that “the conduct of monetary policy in 2021-22 would be guided by evolving macroeconomic conditions, with a bias to remain supportive of growth till it gains traction on a durable basis while ensuring inflation remains within the target.”

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