Reserve Bank of India (RBI) maintains status quo in its October monetary policy. CNBC-TV18’s Latha Venkatesh explains what it means for the markets in Editor’s Take.
It is almost entirely on expected lines, nothing was changed in terms of rates or even the stance. In the stance, the whole phrase was retained in toto, with not in even a comma changed or inverted quotes, so it shouldn’t surprise anybody.
In terms of liquidity, the market was willing to expect that the GSAP could be reduced and that is what you call the bond buying. They were expecting it to come down to Rs 50,000 crore but they were probably not quite prepared that it would go down to zero.
However, the RBI has still mollified it saying that it still remains open to do it if needed and do the other instruments like open market operations (OMO).
The draining of liquidity via variable rate reverse repo (VRRR) taking away the excess money for a fourteen day period was expected. And it was expected that RBI would increase the amount but they thought it would be Rs 5 lakh crore, RBI has decided to drain Rs 6 lakh crore.
One could say that on liquidity, it was a little more hawkish than expected, though on stance and rates, it was as expected.
Coming to some confusions that many people can have. When the monetary policy committee (MPC) describes the economy, they sound somewhat positive saying that power, freight, PMI or whole lot of things have improved.
If the economy is so robust, why you should be keeping all the emergency measures that you introduced in June 2020. All those steps are retained, that was a minus 21 percent and now it is past +21 percent going on into 9.5, it is not gelling – that vast difference between repo and reverse repo. It is normally only 25 basis points (bps), the rate at which RBI takes money is 25 bps less than the rate at which it gives money. It is expanded to 65. That has not been changed.
However, the most important part is this – you don’t change the reverse repo, you keep it at 3.35 percent but there is 14-day cut off – 14-day money the RBI is absorbing at 3.99 percent, almost 4 percent. So overnight money is 3.35 percent, 14-day is almost 4 percent, it is not gelling.
This is happening auction after auction and RBI says we are doing what the market wants. The market is asking for that much and therefore we are taking the cut-off at that.
What will happen? At the most, the 10-year is moved-up only by 5 bps because of this extra draining. Short tenor paper may rise.
Watch the video for more.