With sequential economic recovery taking shape amidst gradual phasing out of lockdown restrictions and improvement in vaccination coverage, the normalization of monetary policy needs to get nudged...
Download ReportOct-21 MPC Minutes: Soft signal for normalization
With sequential economic recovery taking shape amidst gradual phasing out of lockdown restrictions and improvement in vaccination coverage, the normalization of monetary policy needs to get nudged (as also seen in case of few key countries) to avoid “undue surprises”. We stick to our call on the need to restore the width of the LAF corridor to 25 bps (normal setting) from 65 bps currently (emergency level accommodation). The expansion in the scope of VRRR auctions to calibrate the liquidity free float and pushing short term rates up within the LAF corridor is indeed a precursor for interest rate normalization and should be seen as a soft signal. While MPC is not mandated to vote on reverse repo rate, we now see possibility of at least 3 out of 6 members to support a two step upward adjustment (20 bps each) in reverse repo rate between Dec-21 and Feb-22. The signal from MPC minutes suggest that policy stance is likely to get retained as accommodative in Dec-21 and Feb-22 with repo rate remaining unchanged at 4.00%.