RBI indicates slow departure from ultra-loose liquidity policy

RBI to restore liquidity operations timing to normal hours in a phased manner, to start with variable rate reverse repo window from Jan 15

The Reserve Bank of India (RBI) on Friday signalled a withdrawal of ultra-loose monetary policy by restoring normal liquidity management operations in a phased manner following “a review of evolving liquidity and financial conditions". 

To begin with, the 14-day variable rate reverse repo auction will be conducted between 11.30 to 12 noon from January 29. However, for now, the fixed rate reverse repo and marginal standing facility (MSF) operations will continue to be available throughout the day.  

The restoration of normal hours, according to the central bank, is on a par with other measures taken for the various market segments. For example, the truncated trading hours from April 7 were restored in a phased manner with effect from November 9, 2020. 

But experts say the restoration of normal hours points to a slow exit from ultra-loose monetary policy, but not adopting a tight liquidity policy. The RBI also did not miss the opportunity to assure the market participants of favourable liquidity conditions in the coming days.  

“As stated in the last MPC (monetary policy committee) statement on December 4, it is reiterated that the RBI will ensure availability of ample liquidity in the system,” the RBI said in its statement.  

But this is not free as you like liquidity window either. The RBI said it would accept up to Rs 2 trillion in the variable rate window on January 15.  

“The RBI has started unwinding its ultra-loose monetary condition in a very careful manner. Not using the scheduled monetary policy meeting for this announcement is a nuanced approach so that it is less disruptive," said Soumyajit Niyogi, associate director at India Ratings and Research.  

The immediate impact of this should be visible on short-term rates. On Wednesday’s treasury bill auctions, the cut-off yields of 91-day to 364 days treasury bills came at 3.02-3.44 per cent. That means even one year money is available below the overnight reverse repo rate of the RBI.  

This is because the banking system liquidity has been kept at nearly Rs 6 trillion, while the entire system liquidity, including government balances, continues to remain above Rs 8-trillion mark. And the RBI’s assurance so far has kept the rates ultra-low for everyone, including for top-rated private firms.  

Such low rates have been discussed even among the MPC members, who were worried that such low rates and plentiful liquidity would feed into inflation and the conduct of the monetary policy would turn challenging. 

The restoration announcement and the act of restoring the normal timing for the window “should realign short-term rates towards repo rate and above”, Niyogi said. 

Having said that, experts do say it would be a very long time before the RBI gets back to its original stance of keeping liquidity contained at plus-minus 1 per cent of the total deposit base, which is roughly about Rs 1.5 trillion surplus or deficit liquidity, depending upon the stance of the monetary policy.  

The RBI still carries on with an ‘accommodative’ policy stance, and that too would likely not change before the second half of the calendar year, economists say.