Even as the Monetary Policy Committee (MPC) decided to keep the repo rate unchanged and retain the accommodative policy stance to support economic recovery, the Reserve Bank of India on Friday stepped up the focus on liquidity management.

The central bank outlined measures for a calibrated draining out of surplus liquidity from the banking system via enhanced variable rate reverse repo (VRRR) auctions of 14 days and suspending G-SAP (Government Security Acquisition Programme).

On the repo rate, the MPC voted unanimously to maintain the status quo. But the decision to retain the accommodative policy stance was voted 5 to 1 with Jayanth R Varma dissenting. Members had voted on similar lines at the Augustmeeting.

The policy repo rate has been static since May 2020, when it was reduced from 4.40 per cent to 4 per cent. Explaining the rationale for holding the rate, RBI Governor Shaktikanta Das said, “Growth impulses seem to be strengthening and we derive comfort from the fact that the inflation trajectory is turning out to be more favourable than anticipated.”



Liquidity normalisation

In view of the liquidity overhang in the banking system of more than ₹13-lakh crore, the RBI said it will conduct 14-day VRRR auctions and also stop G-SAP. It announced a fortnightly calendar for VRRR auctions.

These two steps indicate that the central bank is preparing to drain out surplus liquidity. “Our entire approach is one of gradualism. We don’t want suddenness. We don’t want surprises,” Das said. “...And more so, we do realise that as we are approaching the shore, when the shore is so close, we don’t want to rock the boat because we realise that there is a life, there is a journey beyond the shores.”

On Friday, the RBI rolled out the first VRRR auction, whereby it sucked out ₹4-lakh crore. The size of each subsequent fortnightly auction will be increase by ₹50,000 crore, culminating in a ₹6-lakh-crore VRRR auction on December 3. Depending upon the evolving liquidity conditions — especially the quantum of capital flows, the pace of government expenditure and the credit offtake — the RBI may also consider complementing the 14-day VRRR auctions with 28-day VRRR auctions in a similar calibrated fashion, the Governor said.

MD Patra, Deputy Governor, said: “Now, the (VRRR) auctions have two benefits for us — they enable better pricing of excess reserves and they give the RBI a better handle on these reserves by giving some more discretion in managing liquidity.”

Even with all these operations, the liquidity absorbed under the fixed rate reverse repo would be ₹2-3 lakh crore in the first week of December.

Rajkiran Rai G, Chairman of Indian Banks’ Association and MD & CEO of Union Bank of India, said: ”As was widely expected, the RBI has given a roadmap for the tapering of the excess liquidity from the system in a calibrated manner without disrupting the government borrowing programme or the liquidity needs of the economy.

Crisil, in a report, noted that the normalisation could continue in the coming months and a hike in the repo rate by 25 basis points by fiscal 2022-end, assuming strengthening economic recovery and elevated inflation risks. The MPC revised downwards its retail inflation projection for FY22 to 5.3 per cent against the earlier 5.7 per cent even as it retained its projection for real GDP growth at 9.5 per cent.