RBI may pause repo rate cut amid surge in GDP growth: SBI report

Expectations built till a few days back of a shallow rate cut of 25 basis points (bps) by the RBI appear to have faded as finer readings of the strong Q2 growth print and the evolving playbook make the choice tilted in favour of a pause in December policy, according to an SBI Research report released on Sunday. 

A broader trend emerging now from rate actions of Central Banks worldwide is that monetary policy has entered a phase of pause, with differences across geographies. The number of rate decisions, while still dominated by cuts, is far less in count. However, equity markets globally are veering towards irrationality, even as NIFTY 500 in comparison looks better represented, the report further states.

"But it is important to continue with affirmative actions outside policy space. Important to change the market perception too as the G-Sec market is increasingly dislocated, with the spread between the overnight repo rate and the 10-year G-Sec yield widening from 40–50 bps to 100-110 bps, despite a cumulative 100 bps rate cut and CRR reductions disrupting monetary policy transmission," stated the report released in the run-up to the Monetary Policy Committee meeting in the first week of December.

Broad basing growth, sans any rate cut, may necessitate ushering in a "neutral regime" tantamount to "calibrated easing" by targeting yields and liquidity management simultaneously, the report further states.

The RBI should make a communication with the market with a clear distinction between temporary liquidity injection or withdrawal and permanent liquidity injection or withdrawal when market conditions or sentiments warrant such action. This will ensure the coexistence of short-term liquidity measures synchronised with long term liquidity measures without altering the basic structure. This will also usher in an efficient market with less cacophony and more rationality, the SBI report observes.

It is of the view that the RBI may have to ensure "calibrated easing" within “neutral stance” through liquidity measures to ensure a sobering impact on yields.

This would entail: Injection of durable liquidity operations like open market operations (OMO) or any other tools in line with the Revised Liquidity Management Framework. Publication of the OMO Calendar across the curve for liquidity management and rate transmission will be a fillip. To ensure full transmission of the 100 bps rate cut, OMO purchase auctions may be conducted to maintain durable liquidity at 2-2.5 per cent of NDTL. To normalise the spread between Government Securities (G-Secs) and State Development Loans (SDLs), which has increased, SDLs may be included in the Durable Liquidity operations, the report states.

To support market sentiment and anchor long-term yields, the RBI may consider a liquidity-neutral Operation Twist in G-Secs and SDLs to reduce volatility and restore stability in the yield curve, the SBI report added.