Strategy, stance: The fine dictum in RBI policy

The RBI policy statement of status quo has a clear distinction between policy strategy and policy stance and can coexist simultaneously. While a policy strategy may indicate RBI calibrating the liquidity normalisation to ensure that government borrowings face no disruption, the policy stance may still indicate rate adjustment to quell inflation expectations should inflation surprise on the upside. Though the RBI has kept reverse repo rate unchanged, it has mentioned that gradual absorption of liquidity through VRRR auction has pushed up the operative overnight rate from 3.37 per cent to 3.87 per cent over the last six months. This will also ensure any normalisation of policy corridor to be non-disruptive in the future.

The RBI policy statement indicates that the RBI is confident of managing the government borrowing programme by resorting to non-conventional policy tools. This could involve, exercising green shoe option, provision of higher borrowings through short-term route, issuing papers by matching the future redemption profile, and even using a higher cash balances and collections through small savings as a cushion to lower net borrowings. For the financial year 2022-23 (FY23), the government has budgeted net market borrowing of Rs 11.2 trillion, that could be lower by at least Rs 2.5 trillion. For FY22, if we consider there are no borrowings in the remaining part of the current fiscal year, the market borrowing would get reduced by Rs 71,000 crore. Clearly, the yields could head lower and even touch 6.55-6.6 per cent in FY22.  

On the regulatory and development policy from the tenure of announcements only indicate policy continuity and fine tuning. Permitting banks in India to undertake transactions in the offshore Foreign Currency Settled Overnight Indexed Swap (FCS-OIS) market will add to the breadth of the market.

Second, to facilitate digital delivery of various government schemes to the beneficiaries, the RBI has increased the cap on amount for e-RUPI vouchers issued by governments to Rs 100,000 per voucher and allowed use of the e-RUPI voucher multiple times. We believe that this will promote use of e-RUPI which is easy, safe and secure. In future, this could even be used as digital rupee as the RBI onboards digital currency.  Currently 16 banks and 1,959 hospitals are live on e-RUPI.

Third, TReDS is an electronic platform for facilitating the discounting of trade receivables of MSMEs through multiple financiers. Keeping in view the growing liquidity requirements of the MSMEs, RBI has increased the NACH mandate limit to Rs 3 crore (from present Rs 1 crore) for TReDS settlements.

Finally, the guidelines on CDS (being announced later), broad basing the protection sellers and providing the much-needed hedge against risks in corporate debt issuance in a resurgent CDS market augurs well.

Even as the market was surprised by the tone of the RBI policy, we believe RBI may have moved ahead of the market in terms of expectation setting. Yields on G-Secs declined by as much as 17 basis points in 5 year bucket. Clearly, the RBI has provided comfort in assuaging debt market sentiments of an unfavorable demand-supply balance.

 

The writer is Group Chief Economic Advisor, State Bank of India. Views are personal