Money & Banking

RBI policy review: A subtle shade of policy normalisation, says Acuite Ratings

Our Bureau Mumbai | Updated on August 09, 2021

The agency expects RBI to start normalisation of policy rates by increasing reverse repo rate

The expanded scope of Variable Rate Reverse Repo (VRRR) auctions for temporary absorption of liquidity surplus could act as a precursor for monetary policy normalisation, according to Acuite Ratings & Research.

The Reserve Bank of India (RBI) had announced on August 6, 2020, that it will conduct fortnightly VRRR auctions of ₹2.5 lakh crore on August 13, 2021; ₹3 lakh crore on August 27; ₹3.5 lakh crore on September 9; and ₹4 lakh crore on September 24.

“In our opinion, the policy review of August 2021 has a subtle shade of policy normalization in the form of the scale up of the VRRR auctions for temporary deployment of excess liquidity since it can lead to some firming of short-term rates and realignment of the yield curve.” the credit rating agency said.

The agency continues to expect the central bank to start normalisation of the policy rates by increasing reverse repo rate from 3.35 per cent currently, to 3.75 per cent by end of Q3FY22 or during Q4FY22. Then followed by a 25 basis points hike in the repo rate to 4.25 per cent in Q1FY23.

In his bi-monthly monetary policy review statement on August 6, RBI Governor Shaktikanta Das emphasised that the enhanced VRRR auctions should not be misread as a reversal of the accommodative policy stance, as the amount absorbed under the fixed rate reverse repo is expected to remain more than ₹4.0 lakh crore at end-September 2021.

Referring to the Governor’s post policy press conference statement that the RBI continues to remain in “whatever it takes” mode for providing support for nurturing nascent growth impulses, Acuite said this highlights the unambiguous policy desire to backstop growth till Covid related economic and financial uncertainties remain.

Published on August 09, 2021

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