RBI’s stance shift delivers ‘dose of credibility’, 25 bps hike still likely in Dec: Report

New Delhi, Oct 7 (IANS) The Reserve Bank of India’s (RBI) move to change its policy stance from “neutral” to “calibrated tightening” and a 25 basis‑point repo rate hike delivered a dose of credibility, but it does not expect a prolonged, deep rate‑hiking cycle, a report said on Wednesday.

The report from HSBC Global Investment Research said the stance change signals that “rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook.”

The report added that HSBC continues to forecast a further 25 basis‑point hikes in December, taking the cycle to about 50 basis points.

“There is risk of another, especially if growth remains resilient despite a strengthening El Niño. But for now, we don’t see this as a deep rate hiking cycle,” the report noted.

The bigger question on the table at the MPC meeting was how to enhance credibility when the global environment is becoming uncomfortable due to factors related to high oil prices, global yields, and the USD index, the report noted.

It mentioned that preference for a stance change showed clearly that the central bank is prepared for the long haul, in case the global environment remains uneasy for longer.

The RBI said that inflation is partly driven by base effects, and “there is limited evidence of demand side pressures”.

The governor noted that calibrated tightening is a “milder form of tightening”, adding that the liquidity excess would be drained out gradually via a rise in currency in circulation, and the continued use of instruments already at play such as Variable Rate Reverse Repo (VRRRs), FX swaps, FX spot sales, and OMO sales.

He mentioned that CRR hikes, though, on the table, were much lower in the pecking order.

—IANS

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