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RBI again steps in to normalise liquidity

RBI again steps in to normalise liquidity

23 Sep 2021

Mumbai: The Reserve Bank of India (RBI) has taken yet another baby step toward normalising liquidity in the banking system as it prepares to exit an ultra-loose monetary policy approach adopted in the pandemic’s aftermath.

In the latest Gsec acquisition programme, RBI will sell Rs 15,000 crore of government securities to match the similar amount of long term securities it plans to purchase from the market. This will not infuse any additional liquidity in the system, which is estimated to have about Rs 7 lakh crore of excess liquidity currently.

This is the first time since the pandemic the RBI has allowed its bond purchases to be neutral by buying the same amount of bonds as it sold to stabilise yields without infusing any extra liquidity.

Before this, it bought more bonds than it sold adding approximately Rs 2.40 lakh crore of liquidity to the banking system this fiscal.

Dealers said this is an important move by the central bank as it ultimately moves toward normalisation from record levels of liquidity and low interest rates.

“This is the first time that RBI conducted GSAPs in a fashion similar to operation twist,” said Vijay Sharma, executive vice president at PNB Gilt, referring to the central bank’s programme of buying longer-term securities and selling short term papers to prevent yields from increasing.

In GSAP auctions announced on Monday, RBI plans to sell securities maturing in 2022 and buy bonds maturing in 2028, 2031 and 2035. “The move is aimed at arresting any yield rise while striking a balance on liquidity in the system. The central bank clearly does not want any further increase in system liquidity as it has been sucking the liquidity out of the system through regular variable reverse repos,” said Sharma.

“This may be called a micro baby step. But given the amount of liquidity, it does not make any difference. The RBI has clearly stated its focus remains growth and rightly so. Liquidity is likely to remain surplus and we are a long way away from a rate hike given the situation we have in hand,” said Dwijendra Srivastava, CIO debt, at Sundaram Mutual Fund.

To be sure, slow growth and continuing uncertainties mean liquidity is likely to remain in surplus mode for a long time to come. Hence, a rate increase or even a change in RBI’s formal stance is unlikely anytime soon.

“Liquidity will remain in surplus for a long time. Even if inflation breaches 6%, it will not worry RBI much. The key is a pick-up in credit growth which will lead to higher demand. If inflation stays between 5% and 6%, the RBI will keep ample liquidity. Rates may stay where they are if inflation comes below 4% and 5% until we really see a pick-up in growth, which is still a few months away,” said Ashish Vaidya, head of treasury at DBS India.