New Delhi. For the last few months, there was a constant expectation that the Reserve Bank might make a small cut in the repo rate in December. Many economists were assuming that to give some relief to the economy, RBI will definitely cut the rate by at least 25 basis points. But as soon as Q2 GDP growth outperformed expectations, the entire atmosphere changed. Now the indications are clear that RBI will not act hastily and will show inclination to keep the policy unchanged for the time being.
The same thing has been said in a new report which has been released by the country’s largest bank’s research team, SBI Research. The report says that the strong growth of GDP, market conditions and the stance of central banks around the world suggest that India may also lean towards a pause instead of any cut at this time.
Global situation is also indicating pause
The report shows that most of the central banks around the world have now gone into pause mode. Rates have been cut in many countries, but their number is very less. In contrast, equity markets have become quite volatile around the world. Not only this, the report also says that amid economic uncertainties around the world, the risk appetite of investors has weakened. Although India has shown better performance, the global scenario has an impact on our markets and policy movements.
Domestic market also needs some stability
SBI Research has clearly stated that the spread between short term and long term yields has increased abnormally in India. The gap between the overnight repo rate and 10-year G-Sec yield has reached 100 to 110 basis points. This is not a normal situation.
The report says that it is important that RBI gives a clear message to the market as to when liquidity is temporary and when it is permanent. This will create less noise and more stability in the market.
What steps can RBI take
SBI Research suggests that RBI can provide relief to the market even without repo rate cut. For this he should take some important steps like
- Injecting sustainable liquidity into the market through OMO i.e. Open Market Operation.
- Issuing OMO calendar so that the market knows in advance when and how much liquidity will come.
- Taking steps like Operation Twist to reduce the unnecessary gap that has developed between G-Sec and SDL yields.
The report says that this will provide relief to the market without reducing the repo rate and the yields will be controlled in a better way.
What does this mean for investors
If RBI does not cut the repo rate, it will affect both equity and debt markets.
The message for the equity market is that the policy will remain stable, so fluctuations may remain limited.
For the debt market, this is a signal that the use of yield control tools may increase, which will return stability to long term bonds.
The excellent performance of India’s GDP gives confidence to the market, but the role of policy has now become more strategic. This is why the biggest question in the December policy will not be repo rate but liquidity management.
