New Delhi, Nov 30 (NationPress) The earlier anticipation of a minor rate reduction of 25 basis points (bps) by the RBI seems to be diminishing as the latest insights from the robust Q2 growth figures and the shifting economic landscape indicate a preference for a pause in the upcoming December policy, as reported by SBI Research on Sunday.

A significant trend now visible in the actions of Central Banks globally is a transition into a phase of pause in monetary policy, with varying approaches across different regions. While rate cuts continue to dominate the decisions, the overall frequency has decreased. However, worldwide equity markets are trending towards irrational behavior, even as the NIFTY 500 appears more accurately represented, according to the report.

“It is crucial to pursue proactive measures outside the typical policy framework. Changing market perceptions is vital since the G-Sec market is becoming increasingly dislocated, with the gap between the overnight repo rate and the 10-year G-Sec yield widening from 40-50 bps to 100-110 bps, despite a total of 100 bps rate cuts and CRR reductions that are disrupting monetary policy transmission,” the report highlights ahead of the Monetary Policy Committee meeting scheduled for the first week of December.

Broad-based growth, without any rate reduction, may require the introduction of a “neutral regime” resembling “calibrated easing” that simultaneously targets yields and liquidity management, the report further notes.

The RBI should clearly communicate with the market to distinguish between temporary liquidity injections or withdrawals and permanent measures when market conditions dictate such actions. This approach will facilitate the coexistence of short-term liquidity strategies aligned with long-term measures without altering the fundamental structure. It will also promote a more efficient market with reduced noise and increased rationality, the SBI report suggests.

The report advocates that the RBI may need to implement “calibrated easing” within a “neutral stance” through liquidity strategies to have a calming effect on yields.

This would involve injecting durable liquidity through operations like open market operations (OMO) or other tools aligned with the Revised Liquidity Management Framework. The publication of the OMO Calendar across the curve for liquidity management and rate transmission would serve as a boost. To ensure full transmission of the 100 bps rate cut, OMO purchase auctions might be organized to maintain durable liquidity at 2-2.5 percent of NDTL. To normalize the widening spread between Government Securities (G-Secs) and State Development Loans (SDLs), SDLs may be incorporated into the Durable Liquidity operations, as stated in the report.

To enhance market sentiment and stabilize long-term yields, the RBI might contemplate a liquidity-neutral Operation Twist involving G-Secs and SDLs to diminish volatility and restore balance in the yield curve, the SBI report concluded.