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SBI’s Ecowrap report: ‘Stage set for reverse repo normalisation’

The RBI’s reverse repo rate is now 3.35 per cent. This can go up to 3.75 per cent as part of the normalisation.

By: ENS Economic Bureau | Mumbai |
January 27, 2022 3:58:55 am
rbi, rbi recruitmentRBI assistant 2021 preliminary exam will be conducted on March 26 and 27.

The stage is set for a reverse repo normalisation, given that the Triparty Repo Dealing and Settlement (TREPS) and call money rates are ruling higher than the reverse repo rate, a research report said.

“Interestingly for India, with TREPS and call rate currently at much higher than reverse repo rate, the stage is set for a reverse repo normalization,” according to SBI’s Ecowrap report. In the Indian context, during the growth boom for the three-year period ended 2008, when the signalling rate/ repo rate jumped by 275 basis points (bps), the NSE Index had jumped by 79.1 per cent, it said.

The RBI’s reverse repo rate is now 3.35 per cent. This can go up to 3.75 per cent as part of the normalisation. “We however still expect only a gradual unwinding of the liquidity overhang in the banking system by the RBI. The RBI has been conscious of the multi paced recovery and is unlikely to change its rate stance any time soon, though it might clearly move towards a liquidity neutral strategy,” the SBI report said.

It added that the FY23 government borrowing programme needs to be managed very adroitly and orderly by putting a cap on the size of gross borrowing programme. Interestingly, the government may prefer more switches this year in FY22 itself to adjust the net borrowing programme in FY23 to reduce the redemption in this regard, it said.

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Global recovery has started losing momentum, impacted by resurgence of infections in several parts of the world, supply disruptions and the persistent inflationary pressures. The report said yields in India have steadily risen in narrow band. Surprisingly, the market participant, as gauged from latest RBI professional forecaster survey under-priced the impact of rise in yield in response to Fed announcement. The yield is expected to continue northwards in Q4, the report said. “We believe G-sec rates could move in the range of 6.4-6.8% (pre pandemic level). We expect that even though signalling repo rate may be capped at 4% by the RBI, through much of FY23, a spread of 275 points over repo rate may be risk spread given the demand supply inequality.”

“It is expected that crude price might stay high in near future at current levels. However, amidst all this, there is a silver lining. The markets may have factored in that the current omicron will result in an endemic stage in the covid cycle and thus a faster normalization of economic activities,” it added.

“Additionally, in any rate hike cycle, the financial markets actually do better as any material risk is factored in the prices,” the report said. Interestingly, for the two-year period ended 2011, when rates jumped by 375 bps, the NSE Index did jump by a staggering 54 per cent, it said.

Clearly, better risk pricing always results in better price discovery in markets. “We believe that the redemption pressures of the government are going to be significantly large and will peak in FY27 at Rs 6.25 lakh crore. The redemption of G-secs is particularly large beginning FY23.

What is more significant is that average oil bond redemption at Rs 35,000 crore will be an added headache from FY24 onwards,” the report said.

“Considering all this, the RBI and the government in conjunction will have to do large switches in next couple of years to manage the redemption as a part of signalling,” it said.

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