Shaktikanta Das continues to sound dovish, but hints at normalisation

The governor also said that the liquidity surplus in the banking system has increased in Sep, with the potential liquidity overhang amounting to more than Rs 13 trn

The six-member monetary policy committee of the Reserve Bank of India (RBI) maintained a status quo on interest rates for the eighth consecutive meeting, which was along expected lines with Governor Shaktikanta Das batting for retaining the accommodative stance for as long as necessary to revive and sustain growth on a durable basis.

At the same time, the governor said that the liquidity surplus in the banking system has increased in September, with the potential liquidity overhang amounting to more than Rs 13 trillion.

As a result, the central bank has not announced any further bond buying under the Government Securities Acquisition Programme (G-SAP) – a programme that was announced in April. RBI purchased government bonds worth Rs 2.2 trillion under this scheme in the first half of the current financial year. The G-SAP progamme is the equivalent of the quantitative easing undertaken by the central banks of advanced economies.

“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 need for undertaking further G-SAP operations at this juncture does not arise,” Das said, while assuring that the RBI stands ready to undertake G-SAP whenever necessary.

“While the tenor and quantum of VRRR have increased, RBI has moved a step ahead by reducing further active liquidity infusion by not announcing new GSAP calendar after sterilising earlier two instalments with a simultaneous sale of bonds,” said Madhavi Arora, lead economist, Emkay Global Financial Services.

The other instance which indicates that normalisation of the current ultra-loose monetary will happen sooner than later is the comment from the governor on liquidity absorption through 28-day Variable Rate Reverse Repo (VRRR).

“…the RBI may also consider complementing the 14-day VRRR auctions with 28-day VRRR auctions in a similar calibrated fashion,” Das said.

“The announcement of a complete tapering off of the RBI’s quantitative easing programme coupled with an expansion of the scope of the VRRR operations, is a clear sign that liquidity normalisation is now on the offing,” said Aurodeep Nandi, India economist & vice president at Nomura.

According to the central bank’s revised liquidity management framework, announced on February 6, 2020, VRRR of more than 14 days was meant for managing long term durable liquidity. So far, RBI has been conducting 14-day VRRR, which according to the liquidity management framework, was aimed at managing short-term, or transient liquidity.

RBI, however, reminded that the VRRR auctions are primarily a tool for rebalancing liquidity and should not be interpreted as a reversal of the accommodative policy stance.

“Focus was on liquidity management as the VRRR size for 14-day tenor has been increased in a calibrated manner. In a nutshell, dovish policy with focus on sustaining growth momentum amid increasing global uncertainties and supply chain-led high inflation,” said Anubhuti Sahay, head of economic research, South Asia, Standard Chartered Bank.

“Markets, however, might still view higher VRRR cut offs as a subtle way of normalisation in the money market,” she said.

The market clearly saw some indications of the liquidity normalisation process with the yields on the 10 year government bond advancing 3 bps after the measures were announced.

“While the RBI has refrained from committing any G-SAP amount to support bond yields, their emphasis on an “orderly evolution of yield curve” should provide comfort to bond markets. We expect 10-year Gsecs to trade in the 6.20-6.40 per cent range in the near term,” Churchil Bhatt, EVP Debt Investments, Kotak Mahindra Life Insurance Company Limited, said.

While there are subtle indications of normalisation, Das was clear that the central bank has no intention to rock the boat of gradual economic recovery that is underway.

“Our approach is gradualism…we don’t like surprises,” Das emphasised.

Market watchers are now looking at the next policy review meeting in December when the central bank would start increasing the reverse repo rate in order to align the short term rates with the repo rate – seen as a concrete step that the days of ultra-loose policies are over.