RBI’s MPC tightrope: How to keep repo rate unchanged, yet manage the USD-INR ride nimbly

For now, we expect RBI to focus more towards safeguarding macro/financial stability through adequate guidance. If the global risk-off continues to weigh on the rupee, the central bank will soon need to resort to tightening liquidity conditions (via VRRRs, CMB issuances, OMO sales) to anchor the overnight rates towards the MSF. Notably, the recent measures on INR is expected to keep Rupee supported in the near term, which in turn is expected to provide an opportune window for RBI to mop up FX reserves and cap the appreciation. The liquidity conditions are already comfortable and hence there will be a need to introduce liquidity tightening measures to avoid additional easing and ensure overnight hover between repo and MSF rate. This could be followed by a repo rate hike if market stress continues to intensify. Either way, monetary policy must stay steady, nimble, and operationally proactive. (VRRRs refers to variable reverse repo rate and CMB to cash management bills, both liquidity management tools to optimize liquidity.)