To manage the current liquidity needs, the Reserve Bank of India should look at raising reverse repo rate by 20 basis point but outside the purview of the MPC, said SBI Ecowrap report.
The rate is the interest banks earn on the deposit of their surplus funds with the RBI.
The monetary policy review is slated for February 8-10. It is widely expected that the RBI’s MPC will maintain status quo in the key lending rates.
At present, the MPC of the central bank has maintained the repo rate, or short-term lending rate, for commercial banks at 4 per cent.
“We believe the time is now appropriate to go for a 20 bps hike on reverse repo rate, but outside the MPC meeting as enshrined in the RBI act that clearly lays down that reverse repo is more of a liquidity management,” the report said.
“A hike in reverse repo is also required as a larger corridor has resulted in rate volatility.”
However, the report said that the RBI might have to support government’s borrowings in FY23 and which could delay the process of liquidity normalisation.
“While the budget needs to be complemented for fiscal transparency as it is on course to align all off balance PSU borrowings and fiscal deficit possibly by FY24, this would clearly result in a trade-off between liquidity normalisation or rate adjustments.
“The larger question is the blurring of debt management and liquidity management operations of RBI. This again raises the question of whether debt management functions of the RBI needs to be separated from monetary management.”