New Delhi: India’s central bank should consider acting early on rates to strengthen credibility, support the currency and reduce the need for larger tightening later, a report said on Friday.
Suggesting the RBI to consider “hiking early to hike less”, the report from HSBC Global Investment Research said it maintained its view of two 25 basis point hikes in the October and December meetings, taking the repo rate to 5.75 per cent.
“We also expect further clarity/steps on liquidity removal in the October meeting”, the report said.
The report argued that early moves help markets infer whether the governor is genuinely inflation averse, reduces the inflation risk premium and that credibility can do some of the tightening, meaning fewer hikes may be needed later.
“Global and domestic conditions have shifted quickly. The Foreign Currency Non-Resident Bank scheme has pulled in $127 billion, lifting spot FX reserves, but leaving a domestic liquidity glut,” said Pranjul Bhandari Chief India Economist/Strategist, ASEAN Economist.
The oil price is up 20 per cent since July, the Fed hiked 25 bps on September 16 and hinted at further rises, and the USD has rallied overnight – all of which matters for USDINR, the report noted.
The report said that market expectations are now converging in India on two themes: removal of liquidity and RBI rate hikes.
FCNR(B) inflows have created a core liquidity surplus of nearly Rs 15 trillion. Excess liquidity can quickly become inflationary and can raise financial stability risks if banks become dependent on abundant liquidity.
The RBI has already deployed Variable Rate Reverse Repos (VRRRs), Open Market Operation (OMO) Sales, and FX swaps/spot sales, as Cash Reserve Ratio (CRR) hikes and Market Stabilisation Scheme (MSS) issuance are options under consideration.
(IANS)
