While the emergence and spread of the heavily mutated Omicron strain had strengthened the case for the central bank to extend the monetary accommodation, some market participants were nervous about the possibility of a repo rate hike in the future. a context of national inflationary pressures and a hawkish tendency on the part of the US Federal Reserve.
An increase in the repo rate would mark the formal start of the normalization of the ultra-accommodative monetary policy adopted to protect the economy from the Covid crisis.
RBI Governor Shaktikanta Das, however, allayed all such fears on Wednesday by saying that the recovery in growth was not yet strong enough to be self-sustaining and lasting, essentially giving markets confidence that the blow of the central bank’s hand wouldn’t go away anytime soon. .
The yield of the 10-year benchmark 6.10% 2031 fell 4 basis points to 6.35% as traders praised Das’ assurances of political support. The prices and yields of bonds move in the opposite direction.
Markets also welcomed Das’ assessment of the inflation path, with the governor acknowledging that while an unfavorable base effect could push headline retail inflation higher in the months to come, the gauge of price peaked in Jan-March and eased thereafter.
While persistent core inflation – which removes volatile components from food and fuel – remained a political concern, Das expressed optimism that the government’s recent cuts in excise duties on fuel could set in motion. prove to be beneficial.
“In this context, the reduction of excise duties and VAT on petrol and diesel will lead to a lasting reduction in inflation through direct effects as well as indirect effects operating through the costs of fuel and gasoline. transport, ”Das said.
CPI inflation was forecast at 5.3% for 2021-2022, 5.1% in October-December and 5.7% in January-March 2021-2022, with broadly balanced risks. CPI inflation for the first quarter of the following fiscal year was projected at 5.00 percent and is expected to remain at that level in July-September of fiscal 23.
“Overall, the policy was pretty dovish; the governor did not even give an indication of the normalization schedule, which the market expected, ”a senior trader at a large foreign bank said on condition of anonymity.
“The fact that the size of Variable Rate Reverse Repurchase Transactions (VRRRs) has been increased did not surprise the market. In all cases, short-term money market rates aligned with the thresholds of these auctions. The overall cash surplus is still pretty huge, ”he said.
Das said that as part of the liquidity rebalance, the RBI would increase the amount of funds drained from the banking system through 14-day floating rate reverse repurchase transactions.
In what was also pleasant insurance for the market, Das said that the RBI was always open to conducting Twist and open market operations to ensure stable borrowing costs in the economy within the meaning large.
In Operation Twist, the RBI simultaneously buys and sells government bonds with the aim of flattening the slope of the bond yield curve.
The Rupee has been broadly stable against the US dollar, with the latest trading at $ 75.48 / 1 from $ 75.44 / 1 at the previous close. The partially convertible currency did not see much of an impact from the RBI’s policy statement, with traders now awaiting the US Fed’s policy meeting on December 14-15.