Citi expects 15 bps reverse repo hike by RBI at next week's MPC meet

Citigroup Inc. predicts India’s central bank will raise its reverse repo rate next week rather than the December increase expected earlier, becoming one of the first big banks to forecast the rollback of emergency measures as growth recovers and inflation expectations stay high.

Governor Shaktikanta Das will probably announce on Oct. 8 a 15 basis point increase in the rate at which banks park excess cash with the Reserve Bank of India, economists Samiran Chakraborty and Baqar Zaidi wrote in a note Thursday. At the same time, Das would reiterate that policy will keep supporting growth for an extended period of time, they added.

“Increasing size and cutoff rates of recent variable rate reverse repo auctions might have indicated RBI’s willingness to normalize liquidity operations earlier than expected,” the economists said. “With the pandemic induced ‘emergency’ behind us, there is lesser need of continuing with the exceptional policy of keeping the reverse repo as the operative rate.”

The outlier call from Citi follows the RBI’s decision Tuesday, when it surprised markets by setting the 7-day reverse repo cutoff at 3.99%, 57 basis points higher than the previous auction and just a shade lower than the central bank’s policy rate of 4%. Indian stocks, which had been rallying on expectations of continued cheap cash, fell after the Citi forecast was published. 

The benchmark S&P BSE Sensex was trading down 0.4% as of 1:46 p.m. in Mumbai, compared with a 0.1% gain in the Asia Pacific Index.

The RBI may also increase the duration of its variable rate reverse repos beyond 14-days and bring down its bond purchases under the government securities acquisition program for the next quarter to 500 billion rupees or lower, the Citi economists said.