RBI May Hike Repo Rate in Next Two Meetings
A new ICICI Bank report suggests the RBI could raise the repo rate in the next two policy meetings and absorb Rs 2 lakh crore in liquidity.
The Reserve Bank of India (RBI) is preparing for a tighter monetary environment, with expectations that the central bank may implement a repo rate hike in its next two consecutive policy meetings. According to a recent report by ICICI Bank, this move is part of a broader strategy to manage inflation and absorb an additional ₹2 lakh crore of liquidity from the banking system.
Shift to Calibrated Tightening
The Monetary Policy Committee (MPC) recently made a significant move by raising the repo rate by 25 basis points to 5.5 per cent. More importantly, the committee shifted its policy stance from 'neutral' to 'calibrated tightening.' This change in language is crucial for investors and economists to understand.
“The term ‘calibrated’ suggests a more data-dependent approach,” the ICICI Bank report noted. This indicates that while the direction is toward higher rates, the exact timing and magnitude of future increases will depend heavily on incoming economic data.
Managing the Liquidity Surplus
As headline inflation moves toward the upper limit of the central bank's tolerance band, the surplus liquidity in the system is expected to shrink. To maintain a healthy balance, the RBI is likely to continue using several financial tools, including:
- Sell-buy foreign exchange (FX) swaps
- Open Market Operations (OMOs)
- Spot market interventions
The report suggests that the RBI might need to inject approximately ₹2 trillion into the banking system to keep surplus liquidity at a controlled level of 0.5–1% of Net Demand and Time Liabilities (NDTL). Such actions would also help align domestic interest rates with the rising trend seen in global bond yields.
Inflation Outlook and Growth Projections
The central bank has adjusted its economic forecasts, reflecting a more dynamic landscape. Key projections include:
- FY27 GDP Growth: Increased to 7.1 per cent from 6.7 per cent.
- FY27 Inflation: Increased to 5.2 per cent from 5 per cent.
- FY28 GDP Growth: Projected at 7 per cent.
- FY28 Inflation: Expected to settle at 5 per cent.
The Nature of Rising Prices
Recent inflationary pressures have been largely driven by supply-side issues, particularly in food and energy, rather than an explosion in consumer demand. Data shows that while nearly half of all food items are experiencing inflation above 4 per cent, only about one-fifth of items in the core inflation basket have crossed that threshold.
Given this trajectory, analysts expect the terminal repo rate to reach 6 per cent, driven by back-to-back increases over the upcoming policy cycles.