Will the RBI change interest rates in policy review or stand pat?

Later this week, the Reserve Bank of India (RBI) will deliberate in its bi-monthly monetary policy review on whether it should tinker with the key lending rates or keep them unchanged. 

While it is never a good idea to second guess that the central bank could do, most economists and analysts feel that, for now, the RBI could keep status quo and not tinker with the benchmark interest rates. 

In fact, economists at the State Bank of India (SBI), the country’s biggest lender, have suggested that the RBI’s monetary policy committee (MPC) should delay liquidity normalisation measures like a hike in repo rates. 

What is the rationale behind the recommendation made by SBI’s economists?

SBI thinks that delaying a rate hike would be prudent, as it would allow the economy more legroom to recover from the ravages of Covid-induced lockdowns of 2020 and 2021, and grow. 

Soumya Kanti Ghosh, SBI Group’s chief economic adviser, said in a weekend note that with the situation still evolving, a status quo on reverse repo rates may be maintained during the policy announcement later this week. 

“We believe the talks of a reverse repo rate hike in the MPC meeting may be premature as RBI has been largely able to narrow the corridor without the noise of rate hikes and ensuing market cacophony,” said an SBI research report.

SBI says the RBI is not obliged only to tinker with the reverse repo rate. “Also, change in reverse repo rate is an unconventional policy tool that the RBI has effectively deployed during crisis when it moved to a floor instead of the corridor,” it added.

But hasn’t the lending rate already been effectively pushed up?

Yes, the effective rate has already been pushed up by variable reverse repo purchases that are used to suck excess liquidity from the banking system. 

Moreover, there has been calibrated progress towards liquidity normalisation since the October policy with the amount parked in overnight fixed reverse repo declining to Rs 2.6 lakh crore from Rs 3.4 lakh crore before the October policy.  

What have other economists and analysts said on what the RBI should do?

A Kotak Economic Research report said with uncertainty around the new Covid-19 variant, Omicron, the RBI would possibly wait for some clarity before moving decisively on rates.

“We maintain our call for a reverse repo rate hike in February with the December meeting remaining a close call. We expect the RBI to continue on its path of normalisation with the reverse repo rate hike in February policy and repo rate hike in mid-2022-23,” it said.

Property consultant Anarock said there have been expectations that the RBI may raise the reverse repo rate to a nominal extent during the forthcoming monetary policy.

“However, it is likely that the RBI will hold on to the current regime in reaction to the flare-up of Omicron concerns at a time of generalised economic recovery. Therefore, home loan borrowers may enjoy the ongoing low interest rate regime for some more time to come,” said Anuj Puri, chairman, Anarock Group, according to a Mint report.

But is a rate hike inevitable in the future?

Yes, Puri and others think that a rate hike, which will lead to home loan rates spiking, is inevitable. 

When is the RBI set to come out with its final call?

The RBI is set to announce its decision on December 8. 

When was the last time the RBI changed interest rates?

The central bank had last revised the policy rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting interest rates to a historic low.

If the RBI does maintain a status quo on rates, it will be the ninth consecutive time its monetary policy committee will have chosen not to change key policy rates.