Despite signs of recovery, economy not yet out of the woods: RBI Governor

The Governor of the Reserve Bank of India, Shaktikanta Das, on Tuesday said while there are signs of recovery in the economy, it is not yet out of the woods. The Governor made the observation at the 21st FIMMDA-PDAI annual conference.

It may be pertinent to note that Das, in his statement in the last monetary policy committee meeting, had said that managing the economy and the financial markets since the beginning of the pandemic has thrown up several challenges with cross-currents and conflicting objectives. “Under such circumstances, macroeconomic policies have to be carefully nuanced by making judicious policy choices,” he said.

“Continued policy support with a focus on revival and sustenance of growth is indeed the most desirable and judicious policy option at this moment,” the Governor had then said.

In order to facilitate the process for gradual restoration of the variable rate reverse repo (VRRR) auction as markets settle down to regular timings and functioning and liquidity operations normalise, the RBI will also conduct fine-tuning operations from time to time as needed, Das said at the 21st FIMMDA-PDAI annual conference.

The aforementioned operations are to manage unanticipated and one-off liquidity flows so that liquidity conditions in the system evolve in a balanced and evenly distributed manner.

New instruments

The Governor felt that this is also an opportune time to consider new instruments to facilitate hedging of long-term interest rate and reinvestment risk by market participants such as insurance companies, provident and pension funds and corporates

He assured the participants at the conference that on its part, the RBI will endeavour to ensure adequate liquidity in the Government Securities (G-Sec) market as an integral element of its effort to maintain comfortable liquidity conditions in the system.

Das observed that while the market for ‘special repo’ facilitates borrowing of securities, it is worthwhile to consider other alternatives that ensure adequate supply of securities to the market across the spectrum of maturities.

The suggestion comes as liquidity in G-Sec market tends to dry up during periods of rising interest rates or in times of uncertainty.

Securities: Lending and borrowing

Das also mentioned that discussions were held on the introduction of Securities Lending and Borrowing Mechanism (SLBM) with a view to augment secondary market liquidity, by incentivising ‘buy and hold’ type of investors (insurance companies, pension funds) to make available their securities to other market participants.

He urged that these discussions should be carried forward with a view to evolving market-based mechanisms that enable the lending and borrowing of securities as part of overall market development.

Emphasising that expansion of the investor-base is key to further development of the G-Sec market, Das noted that the RBI, together with the Government, is making efforts to enable international settlement of transactions in G-Secs through International Central Securities Depositories (ICSDs).

“Once operationalised, this will enhance access of non-residents to the G-Secs market, as will the inclusion of Indian G-Secs in global bond indices, for which efforts are ongoing,” he said.

Das felt that there is a need to develop a yield curve that is liquid across tenors.

In this regard, he remarked that the secondary market liquidity, as measured by the turnover ratio, is found to be relatively low on several occasions and tends to remain concentrated in a few securities and tenors.

“The yield curve accordingly displays kinks, reflecting the liquidity premium commanded by select securities/tenors,” he said.

“To a certain extent, this is the result of the market microstructure in India, dominated as it is by ‘buy and hold’ and ‘long only’ investors,” Das added.

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