Strongly rebutting the market interpretation that RBI’s secondary market bond sales have reduced liquidity
in the system, and could be the primary cause for short-term spikes in rates, RBI Governor Urjit Patel
drying up was not the correct definition, as the “weighted average call rate continues to be below the policy repo rate. So, to me it is not at all clear (criticism on liquidity), and we are still undertaking a fair bit of reverse repo operations”.
The RBI injects money through repo operations, and sucks out liquidity
through reverse-repo. Both legs have overnight and longer maturity period versions.
State Bank of India (SBI) recently raised its bulk deposit rates by 100 basis points, as liquidity
reduced in the lender. But, the RBI governor said it was “more of a qualitative assessment, rather than quantitative” as bulk deposit rates remained very low for a long time.
RBI Deputy Governor Viral Acharya
explained the RBI’s stance at some length. “I think perhaps the market is adjusting to the fact that we have been in remarkably surplus conditions for a while but I think we are nowhere close to having reached neutrality,” he said in the post-policy conference.
The regulator’s neutral stance would mean on some day banks would borrow from the RBI, while parking excess money on other days.
Acharya said RBI was “essentially absorbing liquidity
to the tune of” Rs 20,000-80,000 crore on a “pretty persistent basis”.
The deputy governor also clarified that while buying portfolio flow dollars from the markets, the central bank
had injected over Rs 1 lakh crore of rupee liquidity
on top of the demonetisation-induced money. That required sterilisation through issuance of special securities but the RBI did that with a lag “because we were waiting for the liquidity
conditions post-demonetisation to normalise, and see whether currency in circulation stabilises”.
The RBI has issued Rs 1 lakh crore of special bonds and sold another Rs 90,000 crore of regular bonds directly to the secondary market to neutralise the swollen liquidity
condition, which would have fanned inflation
if kept for long. In March, banks were parking close to Rs 6 lakh crore of excess liquidity
with the central bank.
Acharya said the RBI would continue to manage the evolving liquidity
conditions through a mix of variable rate repo and reverse repo of various maturities, to meet short-term liquidity
To meet longer-tenure liquidity
needs, it will also consider open market operations, secondary market bond purchase or sale “in case the liquidity
is required to be injected or absorbed on a durable basis”.
conditions would be marginally surplus till the end of this financial year but should reach neutrality in the first half of 2018, Acharya said.
Yields on the 10-year bond closed at 7.031 per cent from its previous close of 7.061 per cent after the liquidity