RBI likely to maintain an extended pause, cut the repo rate by 100 bps in 2024

the Reserve Bank of India expected to maintain long pause and cut the repo rate by 100 basis points in 2024, according to the Deutsche Bank report.

The Reserve Bank of India (RBI) raised the repurchase rate by 250 basis points Federal funds rate by 500 basis points.

In 2024, if the federal funds rate falls by 200 basis points, it would be reasonable to expect the RBI to offer half that size in rate cuts or easing by about 100 basis points per second, said Kaushik Das, chief economist, India and South Asia. Deutsche Bank, he said.

He felt that the RBI was unlikely to start a rate-cutting cycle before the Fed, as the interest differential between the repurchase rate and the federal funds rate is close to an all-time low (currently 150 basis points, while the lowest spread was 125 basis points). basis in June 2006, when the fed funds rate was at 5.25 percent and the buyback rate was at 6.50 percent).

scarcity of liquidity

Liquidity has tightened significantly over the past few months, with the Mumbai Interbank Offered Rate (MIBOR) currently close to 6.90 per cent, 40 basis points above the policy repo rate of 6.50 per cent, according to the report.

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This almost equals the higher price, even with RBI paused in April politics It added that it was contrary to expectations of an increase of 25 basis points.

Therefore, while the RBI preferred to keep the policy rate steady, tighter money market liquidity conditions pushed short-term interest rates above the MSF (perpetual marginal facility) rate of 6.75 percent, Das said.

The net perpetual liquidity surplus fell to ₹55,700 crores by 21st April from approximately ₹80,000 crores on 7th April. The permanent excess liquidity was around INR 2.9 crore at the start of this calendar year

“We expect the RBI to continue with term buy-back auctions, as per the revised liquidity framework for February 2020, which should help prevent excessive liquidity tightening on an ongoing basis, but until then, we see a greater likelihood of short-term money market rates staying up. The repo rate of 6.50 percent is at a range of 10-25 basis points.

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short term rates

Given the effective tightening of short-term interest rates by more than 25 basis points, although the repo rate was fixed at 6.50 percent in the April policy, and assuming that in April Consumer price index inflation Likely to register below 5 per cent, he noted that there was no strong justification for the Reserve Bank of India to continue raising interest rates.

“While a potential weak monsoon could pose a threat to the future trajectory of inflation, we believe rates are high enough to anchor inflationary expectations and therefore we are likely to see any temporary rise in CPI,” Das said.