A broader trend emerging now from rate actions of Central Banks worldwide is that monetary policy has entered a phase of pause, with differences across geographies. The number of rate decisions, while still dominated by cuts, is far less in count. However, equity markets globally are veering towards irrationality, even as NIFTY 500 in comparison looks better represented, the report further states.

RBI May Pause Repo Rate Cut Amid Surge In GDP Growth: SBI report

Indian Central Bank May Not Cut Interest Rates as Expected

A recent report from SBI Research has indicated that the Reserve Bank of India (RBI) may not cut interest rates as expected, with the Monetary Policy Committee (MPC) leaning towards a pause in the December policy.

Global Trends and Market Sentiment

A broader trend emerging from central bank rate actions worldwide is that monetary policy has entered a phase of pause, with differences across geographies. While equity markets globally are behaving irrationally, the NIFTY 500 index appears to be better represented, according to the report.

Need for Affirmative Actions

The report highlights the importance of continuing affirmative actions outside policy space to change market perception and address the dislocation in the G-Sec market.
The spread between the overnight repo rate and the 10-year G-Sec yield has widened from 40-50 bps to 100-110 bps, despite a cumulative 100 bps rate cut and CRR reductions disrupting monetary policy transmission.

Targeting Yields and Liquidity Management

The report suggests that broad basing growth, sans any rate cut, may necessitate ushering in a "neutral regime" tantamount to "calibrated easing" by targeting yields and liquidity management simultaneously.

RBI's Communication Strategy

The RBI should make a communication with the market with a clear distinction between temporary liquidity injection or withdrawal and permanent liquidity injection or withdrawal when market conditions or sentiments warrant such action.

Calibrated Easing and Liquidity Measures

The report is of the view that the RBI may have to ensure "calibrated easing" within "neutral stance" through liquidity measures to ensure a sobering impact on yields.
This would entail injection of durable liquidity operations like open market operations (OMO) or any other tools in line with the Revised Liquidity Management Framework.
The RBI may consider a liquidity-neutral Operation Twist in G-Secs and SDLs to reduce volatility and restore stability in the yield curve.

Key Recommendations

Publication of the OMO Calendar across the curve for liquidity management and rate transmission will be a fillip.
OMO purchase auctions may be conducted to maintain durable liquidity at 2-2.5 per cent of NDTL.
SDLs may be included in the Durable Liquidity operations to normalise the spread between Government Securities (G-Secs) and State Development Loans (SDLs).