RBI maintains status quo on key policy rates, takes additional measures

Mumbai, Aug 06 As it was expected, the RBI has maintained its status quo on key policy rates like Repo and Reverse Repo while reviewing its annual monetary policy today. Thus, Repo rate will continue to be at 4 per cent, whereas reverse Repo rate will also remain unchanged at 3.35 per cent.

This decision was taken post three-day meeting of the monetary policy committee (MPC) which was concluded today.

Also, The MPC decided on a 5 to 1 majority to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target, going forward.

The RBI governor, Shaktikanta Das in a statement, said, "As the second wave of the pandemic ebbs, containment eases and we slowly build back, vaccine manufacturing and administration are steadily rising. Yet the need of the hour is not to drop our guard and to remain vigilant against any possibility of a third wave, especially in the background of rising infections in certain parts of the country. Our actions, together with those of the Government, are aimed at alleviating distress and prioritising growth, while keeping the financial system healthy and stable."

The monsoon has revived after a brief hiatus and kharif sowing is gaining momentum. Some high frequency indicators are also looking up again during June-July. Our expectation is that activity is likely to gather pace with progressive upscaling of vaccinations, continued large policy support, buoyant exports, better adaptations to COVID-related protocols, and benign monetary and financial conditions, he hoped.

The central bank has retained its projection of real GDP growth at 9.5 per cent in 2021-22 consisting of 21.4 per cent in Q1; 7.3 per cent in Q2; 6.3 per cent in Q3; and 6.1 per cent in Q4 of 2021-22. "Real GDP growth for Q1:2022-23 is projected at 17.2 per cent," the RBI governor said.

Inflation may remain close to the upper tolerance band up to Q2:2021-22, but these pressures should ebb in Q3:2021-22 on account of kharif harvest arrivals and as supply side measures take effect.

Taking into consideration all these factors, CPI inflation is now projected at 5.7 per cent during 2021-22: 5.9 per cent in Q2; 5.3 per cent in Q3; and 5.8 per cent in Q4 of 2021-22, with risks broadly balanced. CPI inflation for Q1:2022-23 is projected at 5.1 per cent Liquidity and Financial Market Conditions, he said.

Under the revised liquidity management framework announced on February 06, 2020, the Reserve Bank has been conducting 14-day variable rate reverse repo (VRRR) auctions as its main liquidity operation. With the commencement of normal liquidity operations, the VRRR, which was temporarily held in abeyance during the pandemic, has been re-introduced since January 15 and the initial absorption of Rs 2 lakh crore has been rolled over in the subsequent fortnightly auctions. In parallel, access to the fixed rate overnight reverse repo has been kept open. Markets have adapted and even welcomed the VRRR in view of the higher remuneration it offers relative to the fixed rate overnight reverse repo. Fears that the recommencement of the VRRR tantamounts to liquidity tightening have been allayed. We have seen higher appetite for VRRR in terms of the bid-cover ratio in the auctions, he said.

Considering all these aspects, it has now been decided to conduct fortnightly VRRR auctions of Rs 2.5 lakh crore on August 13; Rs 3.0 lakh crore on August 27; Rs 3.5 lakh crore on September 9 and Rs 4.0 lakh crore on September 24. These enhanced VRRR auctions should not be misread as a reversal of the accommodative policy stance, as the amount absorbed under the fixed rate reverse repo is expected to remain more than Rs 4.0 lakh crore at end[1]September.

Needless to add that the amount accepted under the VRRR window forms part of system liquidity. The Reserve Bank's secondary market G-sec acquisition programme (G-SAP) has been successful in anchoring yield expectations while eliciting keen response from market participants.

We propose to conduct two more auctions of Rs 25,000 crore each on August 12 and August 26, 2021 under G-SAP 2.0. We will continue to undertake these auctions and other operations like open market operations (OMOs) and operation twist (OT), among others, and calibrate them in line with the evolving macroeconomic and financial condition, he said.

The RBI has announced additional measures. Elaborating on it, the RBI governor said that the scope of the on-tap TLTRO scheme has been further extended by a period of three months until December 31.

To provide comfort to banks on their liquidity requirements, including meeting their Liquidity Coverage Ratio (LCR) requirement, this relaxation which is currently available till September 30 is being extended for a further period of three months, i.e., up to December 31. This dispensation provides increased access to funds to the extent of Rs 1.62 lakh crore and qualifies as high quality liquid assets (HQLA) for the LCR.