Nomura says policy normalisation has begun in India

RBI Governor Das also announced a gradual increase in the quantum of funds to be withdrawn from the banking system through variable rate reverse repo operations. The size of these operations has been increased from Rs 2 lakh crore at present to Rs 6 lakh crore by December.

While the central bank lowered its inflation forecast on the back of a softening of food prices, its actions on the liquidity front clearly signalled its intention to start normalising the ultra-loose monetary policy adopted to tackle the Covid-19 crisis.

“Importantly, RBI gave a clear signal of durable liquidity normalisation at this meeting, by ending (instead of tapering) its QE programme (G-SAP) and announcing higher quantum and signalling longer tenor variable reverse repo rate (VRRR) auctions,” Nomura’s economists wrote.

According to Nomura, the central bank is likely to raise the reverse repo rate – currently the operative cost of overnight funds for money markets — in December.

“We maintain our baseline view of a 40 bp reverse repo rate hike at the December policy meeting, with some risk that this could be delivered in two steps (in December and February). Alternatively, the RBI may choose to modulate liquidity to take effective rates higher, even without hiking the reverse repo rate, which would amount to stealth tightening,” the Nomura note said.

The foreign brokerage also expects RBI to start lifting the benchmark policy repo rate (currently at an all-time low of 4.00%) in February along with a change in the stance of monetary policy from ‘accommodative’ to ‘neutral’. It expects a cumulative 75 basis points repo rate hikes in 2022 with the first raise in February.

“On the whole, we believe that policy normalisation has begun in India…we continue to look to pay five-year swap rates on dips due to higher oil prices and US rates.”