A Benign RBI with a Dovish Tilt and Patient Policy Stance: RBI Monetary Policy Feb 2022 Announcements

10 Feb 2022

RBI in its February policy review decided to keep both Repo and Reverse repo rates unchanged at 4% and 3.35% respectively while presenting a weaker growth (7.8%) and benign inflation (4.5%) forecast for FY23. RBI’s FY23 inflation forecast (4.5%) is lower than Citi’s estimate of 5.0%. The accommodative stance, barring one dissent, highlighted the dovish stance of the committee. Citi analyst’s push back their first repo rate hike view to October from August earlier while expecting the 10y bond yield to push towards 7.25% in the months ahead. Key points appended Below:

• 1. Growth and Inflation: RBI’s subdued growth-inflation view suggests delayed policy normalization. Citi analysts observe a sharp drop in RBI’s inflation forecast between 1H and 2H – from ~5% to ~4.1% likely owing to RBI being comfortable of no demand side pressures emerging on inflation, because of continued output gap- even in FY23. Citi analysts observe that the inclusion of the word “broad based recovery” in its forward guidance about continuance of the accommodative stance may potentially delay any change in stance. RBI’s growth and inflation forecasts are both lower than Citi estimates (GDP 8.3% and CPI 5% for FY23) despite penciling in declining oil price trend for FY23 at average of $67/bbl.
Source: Citi Research, RBI


• 2. Normalization of Rates: Contrary to market and Citi analysts’ expectation, RBI decided to keep reverse repo unchanged. The RBI will conduct a Variable Repo Rate (VRR) auction alongside the Variable Reverse Repo Rate (VRRR) auctions to take care of large intra-month volatility in banking system liquidity. RBI governor in the post policy press conference indicated that the reverse repo has not been hiked yet owing to no change in the stance.
Source: Citi research, RBI, CEIC data Co. limited


• 3. Expected Path of Policy Normalization: Citi analyst expect a likely stance change to neutral before at the august meeting. They expect the normalization of the corridor to happen simultaneously with the first repo hike, although there is a small probability that it can occur along with the stance change. Refer to the chart below for details.
Source: Citi Research


• 4. Summary: Risks may have increased for assessment that RBI policy is falling behind the curve and as per Citi analyst this may steepen the swap curve.RBI’s continued focus on actively using Variate Rate Auctions for both Repo and Reverse Repo may reduce the risk of volatile swings in overnight MIBOR rate, thereby reducing the level of volatility premia priced into short tenor swaps. They expect 10y bond yield to push towards 7.25% unless RBI provides explicit and quantitative support for bonds.
Source: Citi research

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