RBI Monetary Policy Tightening Hints Imminent Reverse Repo Rate Hike

The Reserve Bank of India has given its strongest indicator yet of its intent to embark on an imminent and formal normalization of extraordinary policy accommodation undertaken to shield the economy from the Covid-19 crisis. RBI has been actively taking steps to nudge money market rates towards the benchmark policy repo rate, rather than the reverse repo rate, which had actively dictated the overnight cost of funds for banks amid record surplus liquidity in the banking system. The central bank has taken clear strides towards firmly re-establishing the primacy of the repo rate as the benchmark overnight cost of funds. And it has done so without actually raising the reverse repo rate and therefore creating immediate headlines. The central bank would conduct a three-day variable rate reverse repo auction worth Rs 2 lakh crore from 1:30-2:00 pm on Wednesday. The RBI commenced with draining liquidity through variable-rate reverse repo auctions in January 2021, but this is the first time that the central bank is conducting a 3-day operation instead of a seven-day or fourteen-day auction By providing banks with the opportunity to receive as much as 3.99 per cent (the highest permissible cutoff rate for a reverse repo window in the prevailing interest rate structure) for parking three-day funds, the RBI will essentially drive up ultra-short-term rates to within a shade of the prevailing repo rate of 4.00 per cent. Now, it is a done deal that the reverse repo rate will be hiked in February