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With the intention to fight sticky inflation, the Reserve Bank of India (RBI) has decided to suck excess liquidity from the banking system, with a term reverse repo auction. The move, which comes just ahead of the bi-monthly monetary policy review on Tuesday, is aimed at keeping liquidity in the deficit mode, and sending the message the central bank will continue its anti-inflationary stance.
The RBI had announced four-day term reverse repo variable rate auction for Rs 15,000 crore on Monday, with a greenshoe option to accept offers up to an additional amount of Rs 10,000 crore above the notified amount. The auction will be conducted on Monday and will be reversed on Friday. The move will ensure overnight rates stay above the repo rate, that is, eight per cent.
“The RBI is fighting inflation due to which they want to keep liquidity in deficit mode. But of late that deficit had fallen due to which RBI announced this. The short-term liquidity management is done through this route. The RBI also wants to develop a term curve, so they announced this,” said N S Venkatesh, executive director and head of treasury at IDBI Bank. According to Venkatesh, liquidity was comfortable because banks’ credit offtake was not much and there were government securities redemptions that had happened.
RBI Governor Raghuram Rajan said on Friday in Tokyo he had expected to join hands with the country's new government to bring down high inflation. In April, Consumer Price Index (CPI) inflation accelerated to a three-month high of 8.59 per cent, mainly driven by higher food prices compared with 8.31 per cent in March. The RBI wants liquidity to be in deficit mode in a situation when inflation continues to be sticky.
According to the Urjit Patel Committee report, CPI inflation should be brought down to eight per cent over a period not exceeding 12 months and to six per cent over 24 months before formally adopting the recommended target of four per cent inflation with a band of plus/minus two per cent.
But few bankers believe lenders will not park their excess funds with RBI at seven per cent, which is the reverse repo rate.
“The RBI is doing this to absorb surplus liquidity from the system for four days. Besides that, the RBI doesn't want call money rates to fall below eight per cent. But I do not think banks would do this because those who have surplus liquidity will first re-pay export re-finance rather than lend to the RBI below eight per cent,” said Mohan Shenoi, president, group treasury and global markets, Kotak Mahindra Bank.
