Nomura: Nomura says policy normalization has started in India
RBI Governor Das also announced a gradual increase in the amount of funds to be withdrawn from the banking system through floating rate reverse repurchase transactions. The size of these operations was increased from Rs 2 lakh crore currently to Rs 6 lakh crore in December.
As the central bank lowered its inflation forecast amid easing food prices, its actions on the liquidity front have clearly signaled its intention to begin normalizing the ultra-accommodative monetary policy adopted to deal with the crisis. Covid-19 crisis.
“It is important to note that the RBI gave a clear signal of lasting liquidity normalization at this meeting, by ending (instead of gradually reducing) its quantitative easing program (G-SAP) and announcing a higher quantum and signaling longer term bids on the variable repo rate (VRRR), ”Nomura said. write economists.
According to Nomura, the central bank is likely to increase the repo rate – currently the operating cost of overnight funds for money markets – in December.
“We are maintaining our basic vision of a 40bp reverse repo rate hike at the December policy meeting, with some risk that this could be achieved in two stages (in December and February). Alternatively, the RBI may choose to modulate liquidity to increase effective rates, even without increasing the repo rate, which would amount to stealth tightening, ”the note from Nomura said.
The foreign brokerage house also expects the RBI to start raising the benchmark key rate (currently to an all-time low of 4.00%) in February, along with a change in policy direction. monetary policy from “accommodating” to “neutral”. He expects a cumulative increase in repo rates of 75 basis points in 2022 with a first hike in February.
“Overall, we believe that policy normalization has started in India… we continue to seek to pay five-year swap rates if they fall due to rising oil prices and US rates.”