Wednesday, 27 October, 2021

RBI begins policy normalisation

RBI begins policy normalisation

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NEW DELHI: The Reserve Bank of India (RBI) on Friday kept its policy rates and stance unchanged, but decisively moved to withdraw excess liquidity from the system through its least disruptive liquidity management tool.

The six-member monetary policy committee (MPC), headed by RBI Governor Shaktikanta Das, voted unanimously to keep the repo rate at 4 per cent and the reverse repo rate at 3.35 per cent, report agencies.

The stance would remain ‘accommodative’ for “as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy”, the central bank said. Five of the six MPC members favoured the stance, with external member Jayanth R Varma voting against it once again.

The RBI lends money to banks at the repo rate, and offers the reverse repo rate while absorbing their excess funds. Surplus liquidity rose to a daily average of Rs 9.5 trillion as of October 6, with the potential liquidity overhang amounting to more than Rs 13 trillion, the RBI said.

Therefore, the central bank said it would no longer commit to buying secondary market bonds under its government securities acquisition programme (G-SAP), through which it has injected Rs 2.2 trillion of liquidity in the system (out of the total Rs 2.37 trillion injected through bonds), and would absorb a higher quantum of liquidity gradually through its 14-day variable rate reverse repo (VRRR) auctions.

“Given the existing liquidity overhang, the absence of a need for additional borrowing for GST (goods and services tax) compensation, and the expected expansion of liquidity in the system as government spending increases in line with budget estimates, the need for undertaking further G-SAP operations at this juncture does not arise,” it said.

VRRRs would reduce the surplus liquidity to Rs 2-3 trillion by the first week of December, in what could be considered as the first step towards normalisation of the RBI’s ultra-loose monetary policy.

RBI Deputy Governor Michael Patra said in the policy conference that the central bank was following a step-wise approach to policy normalisation.

“The first is the stopping of liquidity; the second is moving liquidity from fixed-rate reverse repo to the auctions... On the next steps, let me assure you, the RBI has all the adequate instruments. The issue is not of instruments but of timing and calibrations,” Patra said.

By the first week of December, the quantum absorbed under VRRR would rise to Rs 6 trillion, from Rs 4 trillion conducted on Friday. Interestingly, the cut-off of the VRRR auction came in at 3.99 per cent, almost the same as the repo rate. Patra said the cut-off was high because the RBI was in a “passive mode” and was accepting the cut-off that market auctions were throwing up in the process of price discovery.

HSBC economists Pranjul Bhandari and Aayushi Chaudhary wrote the RBI’s steps would limit the addition to durable liquidity and push effective rates up, followed by a reverse repo rate hike over December and February. The markets would not be disrupted by the RBI moves, the duo noted.