The interest rate cycle is about to reverse
The move to restore the liquidity adjustment facility to its pre-pandemic width of 50 basis points is in preparation for the reduction of a surplus of ₹8.5 lakh crore. Liquidity adjustments will now take place within ranges equidistant from the key rate imposed by the permanent marginal facility and the new permanent deposit facility. The central bank believes the bond market is ready for the move, but gilt yields soared above 7% after the announcement. This is despite Das’s assurance that the liquidity tap will be slowly turned off.
The RBI Governor’s statement on a calibrated tightening and the rate-setting committee’s unanimity on reducing monetary accommodation could be interpreted as a signal of an imminent change in stance followed by a slight decline in the bulls interest rate. The leeway of banks in their held-to-maturity portfolio and mortgage borrowers reinforces the message that the interest rate cycle is about to reverse. The nature of inflation has changed since the RBI’s last monetary policy review, and it was only a matter of time before it came into line with other central banks that opted for a landing. steep interest rates.