RBI should hike rates by 50 bps off-cycle without delay: SBI Research
Synopsis
SBI Research is urging the RBI to act outside its regular policy cycle with a 50 bps rate hike and widen the interest rate corridor — tools the central bank has deployed in crises in 2013, 2020 and 2022. With the rupee under pressure in NDF markets and global emerging-market turmoil deepening, the report argues that waiting for the December meeting may be too late.
Key Takeaways
SBI Research has called for an off-cycle 50 bps rate hike by the RBI without delay.
The report recommends widening the interest rate corridor from the current 50 bps , without disturbing the repo rate at 5.5% .
Corridor widening has been tested in financial stress periods of 2013 , 2020 , and 2022 .
NDF markets are under acute pressure, with annualised costs at the shorter end at times double those at the longer end.
The report recommends cutting the export proceeds repatriation window from 15 months to 6 months as the standard norm.
SBI Research expects a larger rate hike at the December policy meeting , with growth forecast to stay above 7.5% .
The Reserve Bank of India (RBI) should move swiftly to implement an off-cycle 50 basis points (bps) rate hike and simultaneously widen the interest rate corridor, as global financial markets face severe turbulence with emerging markets bearing the heaviest brunt, according to a report by SBI Research released on Friday, 9 October.
Why Markets Have Already Priced In Recent RBI Action
While SBI Research acknowledged that the RBI's recent moves on the rate front were a step in the right direction, it cautioned that the impact had already been priced in by markets. As a result, the real-world effect on either yields or the exchange rate remained largely absent, diminishing the practical value of those measures.
The Case for Widening the Interest Rate Corridor
The report argued that widening the interest rate corridor could be among the most effective tools available, citing precedent from periods of significant financial stress in 2013, 2020, and 2022, when such a measure proved its worth. Critically, the RBI holds exclusive authority over corridor adjustments by virtue of its regulatory mandate. According to SBI Research, the central bank can change the corridor width from the current 50 bps to higher levels for a limited period without disturbing the repo rate, currently set at 5.5 per cent. The Monetary Policy Committee (MPC) determines the policy rate required to meet the inflation target, but day-to-day liquidity management remains solely within the RBI's domain.
Government Support Needed on Capital Flows
Beyond monetary tools, SBI Research stressed that the government also needs to play a supporting role. Specifically, it called for a relook at enhancing flows of 'patient capital' into both debt and equity markets, potentially by tweaking the tax and capital gains structure. This, the report suggested, would complement the RBI's monetary interventions and shore up market stability.
Exchange Rate Pressure and the NDF Market
On the currency front, the report flagged significant stress in Non-Deliverable Forward (NDF) markets, where the shorter end of the curve has surged sharply, with annualised costs at times doubling those at the longer end. Activity has concentrated in the 1-to-3-month window, signalling acute near-term pressure on the rupee. SBI Research recommended fine-tuning the toolkit so that exporters increasingly and optimally match their export proceeds and remittances with importers' needs and hedging patterns. Notably, the generous 15-month timeline currently allowed for bringing in export proceeds was described as one that 'cannot be a carte blanche for all', with the report recommending a reduction of this norm to 6 months, with case-to-case extensions permitted.
Outlook: Larger Rate Hike Expected in December
Looking ahead, SBI Research maintained its view that a larger rate hike is on the cards at the December policy meeting, underpinned by expectations that economic growth will remain robust and likely exceed 7.5 per cent again. The combination of persistent inflation pressures, a stressed rupee, and global rate tightening cycles leaves the RBI with limited room to hold back.
Frequently Asked Questions
Why is SBI Research calling for an off-cycle RBI rate hike?
SBI Research argues that recent RBI rate actions have already been priced in by markets and have had no meaningful effect on yields or the exchange rate. With global turmoil hitting emerging markets hard, the report says an off-cycle 50 bps hike is needed immediately rather than waiting for the next scheduled policy meeting.
What is an interest rate corridor and why widen it?
The interest rate corridor is the gap between the RBI's lending rate and deposit rate, which guides short-term borrowing costs. Widening it from the current 50 bps gives the RBI a powerful liquidity management tool without changing the repo rate, and it has worked in past crises in 2013, 2020, and 2022.
What is the RBI's current repo rate?
The RBI's repo rate currently stands at 5.5 per cent. SBI Research recommends widening the corridor around this rate for a limited period as an emergency measure without disturbing the repo rate itself.
Why does SBI Research want to shorten the export proceeds timeline?
The current 15-month window for exporters to repatriate proceeds is, according to SBI Research, too generous and is contributing to rupee pressure. The report recommends reducing it to 6 months as a norm, with extensions granted on a case-by-case basis, to improve dollar supply in the domestic market.
When does SBI Research expect the next major RBI rate hike?
SBI Research expects a larger rate hike at the December 2022 monetary policy meeting, driven by expectations that India's GDP growth will remain strong and likely exceed 7.5 per cent. The off-cycle hike it recommends would be in addition to, not instead of, this December move.
