As the Indian economy shows signs of emerging from the COVID-19 inflicted ravages, market participants and policymakers are of the view that the measures taken during the crisis should evolve in sync with the macroeconomic developments to preserve India's financial stability.
But the central bank said this syncing process will be "gradual, calibrated, and non-disruptive" while the Reserve Bank of India (RBI) remains supportive of the economic recovery.
"Our entire approach is one of gradualism. We don't want suddenness or surprises. More so, we realise as we approach the shore, we don't want to rock the boat. Because we realise there are lives and journeys beyond the shore, so we don't want surprises. Our approach will be calibrated, it will be an approach of gradualism," Shaktikanta Das while announcing the outcome of the fourth RBI Monetary Policy Meet of FY22.
The RBI retained its accommodative policy stance Friday and kept the repo rate unchanged for the financial year 2021-22. The MPC voted unanimously to keep the policy rates unchanged. But it voted 5:1 to maintain an 'accomodative' stance. So the repo rate currently stands at 4 percent and the reverse repo rate at 3.35 percent.
Bond markets surged as the country's benchmark 10-year bond yield hit a 17-month high of 6.30 percent after the decision. The Indian rupee strengthened and broke the 75 mark, trading at 74.96 against the dollar after the RBI halted G-SAP purchases. Share markets also extended gains, with Sensex and Nifty surging 0.8 percent.
To attempt syncing the measures taken during the crisis, RBI on Friday announced the discontinuation of G-SAP operations. RBI had undertaken the G-Sec Acquisition Programme (G-SAP) to address the market concerns after the outbreak of coronavirus and the economy going under lockdown.
RBI had injected Rs 2.37 lakh crore in the first six months of the current financial year, via open market operations, including G-SAP. It had injected Rs 3.1 lakh crore during the full financial year 2020-21.
The programme, per RBI's expectations, was successful in "anchoring the yield expectations" despite the government's large borrowing, Das said Friday. But now given the excess liquidity, he said "the need for undertaking further G-SAP operations does not arise."
Regardless, he said, RBI has several arrows in its arsenal, including but not limited to, conducting Operation Twist (OT) and regular open market operations (OMOs).
One of the main liquidity management frameworks of RBI was variable rate reverse repo (VRRR) auctions. These auctions were resumed in mid-January 2021. And since then, Das said the market appetitive for VRRRs has been "enthusiastic."
Taking this under consideration, RBI is providing a calendar for 14-day VRRR auctions and the rest of it -- fine-tuning or 28-day auctions -- is not pre-determined and will depend on evolving liquidity situation, he said.
He also said this entire exercise is optional. "In VRRR, V stands for variable, but it could also represent voluntary. It is optional, there is no compulsion on the banks to put any amount under this window."
Calendar for VRRR auctions:
Rs 4 lakh crore on October 8. Rs 4.5 lakh crore on October 22. Rs 5 lakh crore on December 3.
It depends on the evolving liquidity conditions like capital flows, the pace of government expenditure, and credit offtake, he said. "This entire exercise is based on the assessment of our liquidity conditions and the outlook in consultation with market participants and other stakeholders of the economy. It is not unilateral action," he added.
He also reiterated VRRR auctions are a tool for rebalancing liquidity as a part of our liquidity management operations. These auctions "should not be interpreted as a reversal of the accommodative policy stance."
RBI has also lowered the FY22 CPI inflation forecast to 5.3 percent from the 5.7 percent projected earlier. He said the macro indicators suggest economic activity is gaining momentum.
Das concluded his speech by saying even as the economic recovery gathers momentum, it is important to not rest in the glory, but work tirelessly to achieve what remains to be done. Quoting Gandhi he said, "to lose patience is to lose the battle."