RBI balances liquidity absorption with calendar on bond purchase

Central bank announces variable rate reverse repo auctions (VRRR) to suck out liquidity

The Reserve Bank of India (RBI) orchestrated a perfect balancing act of sucking out liquidity and at the same time infusing liquidity with bond purchases in the first bimonthly monetary policy review of this financial year.

The central bank announced a variable rate reverse repo auctions (VRRR) to suck out liquidity, and on the other hand announced a calendar for bond purchases: a move that cheered the bond market.

The RBI’s six-member monetary committee decided to maintain a status quo for the fifth consecutive policy meeting while continuing with the accommodative stance, but refrained from giving a guidance on how long the time-bound accommodative stance will remain.

The central bank announced a Government Securities Acquisition Programme 1.0 (G-SAP 1.0), in which it will buy Rs 1 lakh crore worth of government securities in the first quarter of 2021-22 -the first such auction scheduled on 15 April, for Rs 25,000 crore.

On the VRRR auctions of longer maturity--the amount and tenor of these auctions will be decided based on the evolving liquidity and financial conditions, RBI cleared any doubt of the bond market by saying this is a part of its liquidity management operations and should not be read as liquidity tightening. “In fact, by paying a higher rate of interest on liquidity absorptions through the VRRR auctions, the RBI is indirectly expanding liquidity,” RBI governor Shaktikanta Das said while announcing the measure.

“The key takeaway for the policy is the twin announcement of VRRR and G SAP. Though both these announcements, counteract against each other without having any significant impact on liquidity and in a nutshell leaves us pretty much with aligned RBI’s view that the stance will be accommodative and liquidity will be maintained in ample surplus till the time growth recovery become sustained,” Anubhuti Sahay, head of economic research South Asia, Standard Chartered Bank told Business Standard.

“By the bond buy of Rs 25,000 crore on April 15, one auction will be absorbed which is Rs 26,000 crore,” said Samir Narang, Chief Economist, Bank of Baroda.

Yields of the most traded 10-year government security dropped to 6.01% following the announcement as compared with previous close of 6.12%. Bond yields had started to harden since the announcement of a massive Rs 12 lakh crore of government borrowing during the Union budget in February which had made the central bank uncomfortable as it emphaised on an orderly evolution of the yield curve.

“The bigger move was with regards to yield management as the RBI credibly tries to break the negative loop of liquidity (mis)communication and sovereign premia,” said Madhavi Arora, lead economist, Emkay Global Securities.

“The RBI stressed on smooth liquidity management and orderly Gsec borrowings, with a more vocal and defined secondary market GSAP 1.0 to be read largely as an OMO calendar with secondary purchases worth Rs 1tn in 1QFY22,” she said.

Das again on Wednesday highlighted the orderly evolution of the yield curve while announcing the bond purchase schedule.

“…the RBI will commit upfront to a specific amount of open market purchases of government securities with a view to enabling a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions,” he said while announcing the review of the monetary policy.

“The positive externalities of G-SAP 1.0 operations need to be seen in the context of those segments of the financial markets that rely on the G-sec yield curve as a pricing benchmark,” he added.

The policy committee of the central bank kept the repo rate unchanged at 4% - as widely expected – while maintaining the accommodative stance. RBI said the accommodative stance will be continued ‘as long as necessary to sustain growth on a durable basis’ and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.

After the outbreak of the Covid-19 pandemic last year, the central bank has made it clear in the guidance that the accommodative stance will be maintained ‘the central bank emphasized that the accommodative stance of the monetary policy will be maintained, as long as it is necessary to revive growth on a durable basis in 2020-21, and into the next financial year.’ Since this was the first policy of 2021-22, the market was looking forward if the RBI yet again came up with time bound guidance.

“The policy is in line with our expectation in terms of repo rate changes and maintaining the accommodative stance. The tone is also dovish to balanced. We believe that MPC’s decision of not attaching a timeline to its forward guidance is right because we live in uncertain times,” Sahay said.