Observing that there is liquidity overhand of Rs 13 lakh crore in the system, RBI Governor Shaktikanta Das said on Friday that the exceptional measures undertaken during pandemic will be dealt in sync with macroeconomic developments to preserve financial stability.
Since the onset of the pandemic, the Reserve Bank has maintained ample surplus liquidity to support a speedy and durable economic recovery, he said while announcing the outcome of the Monetary Policy Committee (MPC) meeting.
The level of surplus liquidity in the banking system increased further during September 2021, with absorption under fixed rate reverse repo, variable rate reverse repo (VRRR) of 14 days and fine-tuning operations under the liquidity adjustment facility (LAF) averaging Rs 9 lakh crore per day as against Rs 7 lakh crore during June to August 2021, he said.
The surplus liquidity rose even further to a daily average of Rs 9.5 lakh crore in October so far (up to October 6).
The potential liquidity overhang amounts to more than Rs 13 lakh crore, he said.
As the economy shows signs of emerging from the COVID-19 inflicted ravages, he said, a near consensus view emerging among market participants and policy makers is that the liquidity conditions emanating from the exceptional measures instituted during the crisis would need to evolve in sync with the macroeconomic developments to preserve financial stability.
"This process has to be gradual, calibrated and non-disruptive, while remaining supportive of the economic recovery," he said.
As part of the liquidity management, Das said the need for undertaking further G-Sec Acquisition Programme (G-SAP) operations at this juncture does not arise given the existing liquidity overhang, the absence of a need for additional borrowing for GST compensation and the expected expansion of liquidity in the system as government spending increases in line with budget estimates.
"The Reserve Bank, however, would remain in readiness to undertake G-SAP as and when warranted by liquidity conditions and also continue to flexibly conduct other liquidity management operations including Operation Twist (OT) and regular open market operations (OMOs)," he said.
The total liquidity injected into the system during the first six months of the current financial year through open market operations (OMOs), including G-SAP, was Rs 2.37 lakh crore, as against an injection of Rs 3.1 lakh crore over the full financial year 2020-21.
With the resumption of normal liquidity operations since mid-January 2021, he said, 14-day variable rate reverse repo (VRRR) auctions have been deployed as the main instrument under the liquidity management framework.
Market appetite for VRRRs has been enthusiastic.
Moreover, the higher remuneration which VRRR offers vis-à-vis the fixed rate reverse repo is also rendering the former relatively attractive, he said.
"Keeping in view the market feedback, it is proposed to undertake the 14-day VRRR auctions on a fortnightly basis in the following manner: Rs 4 lakh crore as already notified; Rs 4.5 lakh crore on October 22; Rs 5 lakh crore on November 3; Rs 5.5 lakh crore on November 18; and Rs 6 lakh crore on December 3," he said.
Further, he said, depending upon the evolving liquidity conditions – especially the quantum of capital flows, pace of government expenditure and credit offtake – the RBI may also consider complementing the 14-day VRRR auctions with 28-day VRRR auctions in a similar calibrated fashion.
The RBI also retains the flexibility to conduct fine-tuning operations of varying amounts as and when required.
Even with all these operations, the liquidity absorbed under the fixed rate reverse repo would still be around Rs 2 to 3 lakh crore in the first week of December 2021, he said.
Assuring market, Das said, the RBI will ensure that there is adequate liquidity to support the process of economic recovery.
"The Reserve Bank will continue to support the market in ensuring an orderly completion of the borrowing programme of the government.
"Further, our focus on orderly evolution of the yield curve as a public good also continues," he said.
Sharing the global perspective on quantitative easing, the governor said, diverging monetary policy stances are not being dictated by country groupings but by country circumstances.
Among EMEs, some are tightening monetary policy, others are undertaking further monetary stimulus, while a few are on a resolute pause, he said.
"In India, the MPC has maintained a pause and given time and state contingent forward guidance from time to time on maintaining accommodation.
"The conduct of monetary policy in India will continue to be oriented to our domestic circumstances and our assessment," he said.
