RBI Pause in Repo Rate Hike In April and 'Withdrawal Of Accommodation' Stance Expected, Says SBI Research

NEW DELHI: State Bank of India's research arm SBI Research said in a report titled “Prelude to MPC Meeting” that the Reserve Bank of India is expected to pause repo rate hike in April after six consecutive increases, which started with an off cycle rate hike in May last year.

The research arm of the country's largest bank, however, expects RBI to continue with its policy stance of "withdrawal of accommodation."

Simply put, ‘withdrawal of accommodation’ means that the central bank was well aware that there was too much liquidity sloshing around the system and it needed to slowly start tightening it.

"Latest data suggests that bank borrowings from the recently announced Fed Bank Term Funding Programme /BTFP & FHLB window reveal that fears of a greater bank contagion is receding, though deposits of small banks continue to decline at expense of larger banks. Smaller banks seem to be borrowing from Fed to overcome any deposit run. Thus, global conditions are still evolving and fluid. We believe at 6.50%, it could be the terminal rate for now...," the report by SBI Research said.

With liquidity now in deficit mode, the central bank can continue with withdrawal of accommodation stance, SBI Research explained. The report added that the central bank has enough reasons to pause repo rate hike in April as there are fears of slowdown in affordable housing loan market and financial stability concerns assuming a central role.

SBI Research maintained that while concerns on sticky core inflation is justified, it also noted that average core inflation stayed at 5.8% over the last decade and it seemed unlikely that core inflation could decline materially to 5.5% and below due to post pandemic shifts in expenditure on health and education and the tricky component of transport inflation with fuel prices staying at elevated levels is expected to act as the constraint. Going by this logic, more rounds of rate hikes may have to be resorted to by RBI, it was added.

So far, the RBI's Monetary Policy Committee (MPC) has increased repo rate by 250 basis points since May in its fight against stubborn inflation, which came in at 6.44 per cent in February, and it has stayed above the higher end of the central bank's target range of 2-6% for a large part of the current financial year.

Significantly, SBI Research highlighted the resilience of Indian banking system, at a time when there is a banking crisis in developed markets. It said foreign claims on India are $104.2 billion on immediate counterparty basis, and $81.5 billion as guarantor basis. When compared with other major countries, India has least foreign claims, whether it may be on a counterparty basis or as guarantor basis.

India’s ratio of Foreign claims to Domestic claims is also least among countries, signifying that our banking and financial system is very disciplined, and no international balance sheet contagion can start from India, clarified SBI Research.

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