RBI had its 'carpe diem' moment on April 6 policy meet: HSBC

Report says RBI didn't suck out excess liquidity with its permanent tools like OMO, CRR hike

The Reserve Bank of India (RBI) "killed several birds with one stone" in its policy meet on April 6 by not sucking out excess liquidity with its permanent tool like open market operations (OMO) and cash reserve ratio (CRR) hike, an HSBC report says.

According to the global financial services major, the RBI's decision to narrow the policy rate corridor by raising the reverse repo rate and lowering the MSF rate killed several birds with one stone.

"The RBI seized the day on April 6 by not sucking out the excess liquidity via a permanent and blunt tool (like OMO sales or CRR hike). Instead, by outlining its inclination for 'variable reverse repo auctions with a preference for longer term tenors'....," HSBC said in a research note.

"The RBI, in our view, had its 'carpe diem' moment... By not sucking out liquidity... Rather, it aims to mould it gently to give desirable behavioural change a fair shot," the report added.

The six-member Monetary Policy Committee (MPC), headed by RBI Governor Urjit Patel, on April 6 kept the repurchase or repo rate — at which it lends to banks — unchanged at 6.25 per cent but increased reverse repo rate to 6 per cent from 5.75 per cent.

The Marginal Standing Facility (MSF), on the other hand, has been revised downwards by 0.25 per cent to 6.5 per cent. MSF is RBI's overnight lending rate for banks against government securities.

Following demonetisation, excess liquidity of around Rs 4 trillion was sloshed around in the banking system and had distorted the short end of the yield curve, the report said.

"Several short term money market rates such as the CBLO and the T-Bill rates had moved significantly below the repo rate. Pushing up the reverse repo rate is expected to raise these and bring back some normalcy," HSBC added.

There are, however, some risks associated with this move. The RBI has to be watchful of any inflationary pressures post a pick up in demand, and the central bank will also need to make sure that banks are not parking funds in unproductive or risky avenues, the note said.