RBI Likely to Hike Repo Rate in Next Two Meetings, Absorb Rs 2 Lakh Crore Liquidity: ICICI Bank

New Delhi, Oct 8 (KNN) The Reserve Bank of India (RBI) is expected to raise the repo rate in its next two policy meetings and absorb an additional Rs 2 lakh crore of liquidity as it pursues a calibrated tightening stance, according to an ICICI Bank report.

The Monetary Policy Committee (MPC) on Wednesday unanimously raised the repo rate by 25 basis points to 5.5 per cent and shifted its stance from ‘neutral’ to ‘calibrated’ tightening.

The policy statement indicated that the revised stance signals the likely direction of future rate decisions, whether a hike or pause, rather than the extent of further increases. “The term ‘calibrated’ suggests a more data dependent approach,” ICICI Bank said, ANI reported.

The lender expects the liquidity surplus to narrow as headline inflation approaches the upper end of the RBI’s tolerance band. The central bank has been using sell-buy foreign exchange swaps, open market operations (OMOs) and spot market interventions to manage excess liquidity, and these tools are likely to continue.

Based on current liquidity projections, ICICI Bank estimates the RBI may need to inject around Rs 2 lakh crore into the banking system to keep surplus liquidity at 0.5-1 per cent of net demand and time liabilities (NDTL). This could be done through foreign exchange operations or OMOs and would allow domestic interest rates to rise in line with global bond yields.

The report noted that sell-buy swaps have distorted forward premia, while the weighted average call rate (WACR) has generally remained below the policy rate and most other short-end rates have fallen.

Growth, Inflation Outlook

The RBI raised its FY27 GDP growth forecast to 7.1 per cent from 6.7 per cent and inflation projection to 5.2 per cent from 5 per cent. For FY28, growth is projected at 7 per cent and inflation at 5 per cent.

ICICI Bank noted that recent inflation has been driven largely by supply-side pressures from food and energy rather than stronger demand. Inflation diffusion indices also suggest that price pressures remain concentrated in select categories.

Nearly half of food items are recording inflation above 4 per cent, compared with around one-fifth of items in the core inflation basket.

“Given the underlying nature of inflation and trajectory in H2FY28, we expect terminal repo rate at 6 per cent for now with back-to-back increase in repo rate over the next two policies,” ICICI Bank said.

(KNN Bureau)