The central bank said it would discontinue purchases of gilts under the GSAP but re-assured the markets liquidity would remain adequate.
Das asserted the RBI’s approach was one of gradualism. “We do realise as we approach the shore, we don’t want to rock the boat”, the governor observed
Even as it left key policy rates and its accommodative stance unchanged, the Reserve Bank of India (RBI) on Friday signalled the start of policy normalisation, announcing measures to drain excess liquidity in calibrated fashion. Although there has been concerns about the large liquidity surplus and inflationary pressures, RBI governor Shaktikanta Das was clear the economic recovery needed support given that the contact-intensive sectors, accounting for 40% of the economy, were still lagging and that output gap was relatively high. Das asserted the RBI’s approach was one of gradualism. “We do realise as we approach the shore, we don’t want to rock the boat”, the governor observed.
While the real GDP growth forecast for FY22 has been left unchanged at 9.5%, RBI’s projection for FY23 at 7.8% is seen to be somewhat muted. The inflation forecast for FY22 was cut to 5.3% from 5.7% earlier with the central bank seemingly not too concerned about the sharp rise in the prices of crude oil. Experts believe rates may not be hiked for a few more months, but that money market rates would nonetheless move up.
In fact, the cut-off rate of 3.99% for the Variable Reverse Repo Rate (VRRR) auction on Friday was higher than expected although the weighted average rate was 3.6%. The yield on the benchmark closed the session at 6.318%, up five basis points over Thursday’s close.
The central bank said it would discontinue purchases of gilts under the GSAP but re-assured the markets liquidity would remain adequate. It announced a calendar for 14-day VRRRs increasing the quantum from `4 lakh crore to `6 lakh crore by early December. Moreover, 28-day VRRRs could also be introduced to soak up liquidity for longer periods.
Nonetheless, the liquidity in the daily fixed rate reverse repo window is expected to remain high at Rs 2-3 lakh crore, adequate to support growth. “These steps together, are likely to limit the addition to durable liquidity, and push effective rates up, which we think will be followed by a reverse repo rate hike over December and February,” Pranjul Bhandari, chief economist HSBC India, wrote.
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