We have given out a clear, gradual and calibrated roadmap: Das

Our Bureau Mumbai | Updated on October 09, 2021

**EDS: VIDEO STILL** Mumbai: RBI Governor Shaktikanta Das addresses the media via livestream from Mumbai, Friday, March 27, 2020. Das said about Rs 3.74 lakh crore liquidity on aggregate basis will be infused into the financial system to deal with the COVID-19 pandemic. (PTI Photo)(PTI27-03-2020_000040B)   -  PTI

RBI top brass, comprising Governor Shaktikanta Das and the four Deputy Governors — MK Jain, MD Patra, M Rajeshwar Rao and T Rabi Sankar — explain the rationale behind the MPC and RBI decisions

As was widely expected, the monetary policy committee (MPC) decided to keep the policy repo rate rock steady at 4 per cent and retain the accommodative policy stance, as domestic economic activity is normalising after the ferocious second wave retarded momentum.

Simultaneously, the Reserve Bank of India announced liquidity draining measures, including enhanced quantum of liquidity absorption via 14-days variable rate reverse repo (VRRR) auctions and discontinuation of the Government-Security Acquisition Programme (G-SAP).

RBI top brass, comprising Governor Shaktikanta Das and the four Deputy Governors — MK Jain, MD Patra, M Rajeshwar Rao and T Rabi Sankar — explained the rationale behind the MPC and RBI decisions. Excerpts:

How concerned is the MPC about increased pass-through of high commodity prices to inflation and the huge liquidity surplus leading to an asset price bubble?

Das: We analyse the overall global and domestic situation to the extent it has a spillover impact on our economy and also with regard to the various trends in our economy. Our overall policy cannot be directly linked to one set of factors such as stock prices or asset prices. It is a composite kind of assessment which we make, taking into account various factors. We have assessed the liquidity situation. We have said that enough liquidity will be made available to support economic revival, growth and financial markets. And that is getting reflected. Also, we have studied the momentum inherent in growth and inflation scenarios and, based on that, we have taken an overall policy call, primarily determined by the way our domestic economy is likely to play out.

What was the reason behind the sudden decision to halt G-SAP (Government Securities Acquisition Programme)?

Das: First, we don’t imitate what another central bank is doing. Our policy is determined primarily by domestic circumstances. Second, we said that, at the moment, G-SAP is not required. But going forward, the G-SAP option, together with the option of Operation Twist and OMOs (open market operations) are very much on the table.

At the moment, the total quantum (of liquidity) which we are receiving under our fixed rate reverse repo window, which is basically overnight, is ₹4-4.5-lakh crore.

And I have said that even in the first week of December, the quantum expected under the fixed rate reverse repo will be in the region of ₹2-3 lakh crore. Therefore, this is not a steep reduction of the liquidity available in the system because liquidity is parallelly available under the 14-days (VRRR) and the fine-tuning operations.

Would you like to use “surprise” as a policy tool in the current environment?

Das: First, I think, that there is no surprise. And this is not a sudden kind of intervention.

Under the roadmap which I laid out for the 14-days VRRR auctions, it is ₹4-lakh crore today (for which the notification was issued yesterday) and every fortnight it goes up by ₹50,000 crore, ending at ₹6-lakh crore on December 3. So, the overall approach is one of gradualism.

Also see: RBI Gov hints on ‘gradual’ unwinding of exceptional liquidity measures

The total liquidity even currently that we are absorbing, if you put together ₹4-lakh crore under 14-days VRRR and the fine-tuning operation, which is ₹2-lakh crore, ₹6-lakh crore is already coming through the reverse repo window.…And then the deployment of 28-days VRRR or further fine-tuning operations will depend on the evolving situation. So, I do not agree that there is any surprise in what we have done. We have given out a clear, gradual, and calibrated roadmap.

Along with liquidity normalisation, have things normalised on the asset quality front as well?

Jain: While banks and other financial institutions have resilient capital and liquidity buffers as has been seen from their balance-sheets, we have also seen that the stress remains moderate in spite of the pandemic. We are closely monitoring the build-up of overall stress, including stress in micro, small and medium enterprises and retail credit. The RBI is also conducting special meetings and discussions with the top managements of banks, small finance banks and non-banking finance companies.

Can you give us a time-table for the inclusion of India in the global bond index?

The whole matter is in a very advanced stage of discussion with the major index providers. Both the RBI and the government are in constant dialogue with them…There are a few issues, which are being resolved. They have a certain set of expectations and the government, in particular, is discussing with Euroclear authorities and index providers to sort or clarify those issues. It is difficult for us to give a timeline. We are not deciding, they are deciding. But it is in an advanced stage and it should happen, maybe, in the next few months.

The cut-off at the 14 days VRRR has come in at 3.99 per cent. It is a little startling. Should we read it as a “signal”?

Patra: Having offered the 14-day VRRR auction, we will accept what the market gives us and thereby, we will discover the price of excess reserves as indicated by the market. Essentially, we are in a passive mode in terms of the auction.

What triggers does the RBI look at for the interest rate corridor? Why is the RBI not starting the process of pulling out liquidity?

We would look for signs that recovery is getting solidly entrenched and that the inflation rate is moving in a desired direction — that is towards the target. I must hasten to add that we are not looking at destinations but at journeys.

Now the auctions have two benefits for us — they enable better pricing of excess reserves and they give RBI a better handle on these reserves by giving some more discretion in managing liquidity.

On the next steps, let me assure you, RBI has all adequate instruments. The issue is not one of instruments but one of timing and calibration.

The 14-days VRRR auctions are all about taking it (liquidity) out of the passive fixed rate reverse repo, over which RBI has less control, into the auctions where RBI has more control…The next steps will follow.

What will be your trigger in terms of gradualism? We are also seeing a lot of liquidity flowing into asset markets. Is there a predictable trigger?

Patra: There is a certain sequence in which the RBI is proceeding. The first steps were to stop addition to liquidity. We are now moving from a passive liquidity management framework to a regular management framework where we have some discretion in the modulation.

Also see: A journey towards monetary normalisation

As it gets stronger and self-sustaining, and inflation looks like it is heading to the target on a durable basis, we will take the next steps. There is no dearth of instruments with the RBI, it is only a question of calibrating it to the emerging circumstances and timing it so that we avoid nasty surprises.

Penalty for ATMs downtime has come into effect from October 1. This could lead to banks and other entities closing down ATMs in semi-urban and rural areas, undermining the cause of financial inclusion. What resolution is the RBI proposing?

Rabi Sankar: The idea behind the penalty on ATM outages was to ensure that they are available, as much as possible, in areas where the attention paid to ATMs is less, which is largely the rural and semi-urban areas.

We have received feedback, some positive and some raising concerns. There are specific issues but the basic objective to ensure money is available in ATMs is what has made us issue this circular.

Published on October 08, 2021

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