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RBI OBJECTIVES AND ACTIONS

RBI OBJECTIVES

* RBI Governor has reiterated he will be patient and want growth to be durable and sustainable before he starts normalizing policy rates. RBI is expected to maintain its current stance and remain growth supportive in FY21-22.

* RBI signaled its intention to ensure orderly evolution of the G-Sec curve & reduce volatility to ensure a stable rate structure through measures such as OMOs, G-SAP and Operations Twist.

* RBI has made clear its intention to remove excess liquidity from the markets.

* RBI has time and again made the statement of yield curve being a public good as lending by market participants through bonds/ bank loans are at a spread to the relevant G Sec yield.

RBI ACTIONS

* In the Monetary Policy Committee Announcements in early October, policy rates remained unchanged, and accommodative stance was maintained, albeit not unanimously (5-1 vote).

* RBI announced 7-day & 14-day repo to absorb excess liquidity. With focus on managing systemic liquidity, RBI had decided to increase the amount under Variable Reverse Repo Rate from Rs. 4 Lakh crores to Rs.6 lakh crores by the first week of December. RBI may go for higher VRRR tenor and do 28-day auctions to further reduce excess liquidity. Even after all these measures, system liquidity in the month of December is expected to be around Rs 3 Lakh Crores.

* 2HFY22 Gross Borrowing program for FY22 of Rs.5.03 Lakh Crores was lower than market expectations. T-bill calendar was heavy on 3M(~50%) supply. The additional borrowing of Rs 84,000 Crores to compensate the short fall in GST collection Cess of states did not materialize.

* However, the expected reduction in supply of long dated papers did not materialize. Government /RBI instead focused on reducing supply in the shorter end of the yield curve. RBI did not announce any further G-SAP in the October policy announcement.

RBI ACTIONS AND SYSTEM LIQUIDITY

* There has been a consistent increase in net liquidity levels in the markets. RBI has started taking steps to absorb the surplus through various tools, especially through Variable Repo Rate Auctions.

* Going ahead from here will be ample liquidity available in system and the trajectory of CPI inflation which is expected to move down in the coming months.

RBI POLICY ACTIONS

* RBI cut its headline policy rates significantly in May-2020 to provide liquidity to banks to boost lending and encourage economic growth during the pandemic

* The economy recovery is still nascent and service sector has still not come back to its pre pandemic levels. RBI will also take cognizance of the possibility of third wave effecting the Indian economy. RBI is expected to continue to re- iterate its accommodative monetary policy stance for the current financial year.

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