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Below are Views on Monetary Policy by Suvodeep Rakshit, Vice President & Senior Economist at Kotak Institutional Equities

Overall, the policy is as expected on rates and stance. We had raised a possibility of split voting and divergence in members’ opinions, the details of which will be further clear in the minutes. While we had expected the liquidity related normalization measures from September/October, the RBI’s frontloading of VRRR comes with a staggered approach. Given the reasonable demand for the existing 14-day VRRR, the graded additional quantum is not expected to move the overnight rates, just yet. We, however, see this as the first signal towards calibrating liquidity. Tools like overnight VRR, further increase in quantum of VRRR and allowing non-bank participation in the VRRR could be the measures before the onset of policy normalization. Overall, we view this policy as RBI’s signal that it remains watchful on growth while the concerns on inflation has increased. It is unlikely that the RBI will change its stance in the October policy, although the split voting pattern could further increase. We expect the start of policy normalization in the form of hike in reverse repo rate could be around the December policy after risks of further Covid wave fade amidst higher pace of vaccination and visibility of durable growth.”

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