In its Ecowrap report, SBI said the RBI had sent a clear and consistent message on monetary tightening through its policy resolution, the Governor’s statement and the MPC minutes.
However, it questioned the rationale behind injecting liquidity while the central bank was pursuing a calibrated tightening approach.
“We, however, find it a little difficult to understand the reasons behind the RBI’s move to inject liquidity through repo auctions of Rs 2.5 lakh crores even as the primary objective is to ensure that the RBI is in a ‘calibrated tightening’ mode and the RBI Governor also emphasising less on liquidity in the October policy,” the report said.
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SBI noted that the RBI had moved the operating rate to the upper end of the policy corridor, describing it as an appropriate signal during a tightening cycle. However, it said the liquidity infusion appeared difficult to reconcile with the central bank’s emphasis on controlling inflation.
The report also pointed to the RBI’s decision to cancel all Treasury bill auctions, suggesting that markets could interpret the measures as attempts to fine-tune movements in bond yields.Despite these steps, SBI expects Indian government bond yields to remain elevated. The report said yields were unlikely to decline even as US Treasury yields had fallen below 5 per cent, citing expectations of elevated crude oil prices and developments in global bond markets.
SBI said the spread between Indian government securities and US Treasury yields had reached 250 basis points and was moving towards normalisation. It added that elevated crude oil prices could prevent domestic yields from declining.
The report also highlighted the RBI’s changing emphasis in its assessment of economic risks. According to SBI, the October MPC minutes placed greater emphasis on external conditions and financial stability than the August minutes, while giving less emphasis to liquidity and monetary policy transmission.
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SBI said this reflected the RBI’s increased awareness of threats to external stability arising from widening geopolitical conflicts, even as inflation concerns remained central to the decision to tighten monetary policy.
On the broader policy approach, SBI argued that the RBI should avoid managing liquidity through simultaneous injections and withdrawals.
“We believe, while concerns on financial stability may have played a part, but it is better for RBI to stay away from two-way liquidity management policy of both injection and withdrawal simultaneously,” the report said.
Instead, SBI continued to advocate widening the Liquidity Adjustment Facility (LAF) corridor, arguing that it could act as an automatic stabiliser during periods of uncertainty.