Reversing the reverse repo status quo needed to give economic recovery more time to strengthen: report
Amid growing fear of the new variant of the Omicron coronavirus and ahead of the MPC meeting, SBI internal economists urged the central bank to delay liquidity normalization measures through increased repo repo, because such a “cautious step” in the current situation will give more time for the economic recovery to strengthen further.
So far, the Reserve Bank of India (RBI) has sucked up excess liquidity through other measures, resulting in massive excess liquidity brought in in recent months, SBI Research said in a note.
He noted that the use of the reverse repo tool should not be limited to the monetary policy announcement alone.
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In the weekend note, Soumya Kanti Ghosh, chief economic adviser of the State Bank of India group, said that with the situation still evolving, a standstill on repo rates could be maintained in the next policy announcement. December 8.
This keeps in mind that the effective rate has already been raised with VRRRs (variable repurchase agreements) and the amount and content of it can be fine-tuned for the desired outcome, she added.
The liquidity of the system however remains in surplus with the average daily net absorption under the liquidity adjustment facility at Rs 7.6 lakh crore in November, the sustainable liquidity has decreased and now stands at Rs 11.2 lakh crore compared to Rs 12.0 lakh crore at time of previous policy. The excess liquidity has gradually narrowed since the RBI stopped the injection of liquidity through GSAP operations.
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In addition, there has been calibrated progress towards liquidity normalization since the October policy with the amount parked in overnight fixed reverse repurchases decreasing to Rs 2.6 lakh crore from Rs 3.4 lakh crore to the pre-October policy.
Additionally, the RBI largely met its short-term rate hike target with a three-month Treasury bill rate lower than the reverse repo in August, now at 3.52%, taking into account the impact of VRRRs. . Likewise, six-month and one-year Treasury bill rates have risen 20 to 30 basis points since October.
Against this backdrop, the report said: “We believe discussions of a reverse repo rate hike on December 8 may be premature, as the RBI has been able to cut the hallway without the noise of rate hikes. and the ensuing market cacophony.
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“In addition, Section 45Z (3) of the amended RBI Act of 2016 clearly states that the monetary policy committee will determine the policy rate required to meet the inflation target,” Ghosh said.
She added that nowhere in the MPC’s mandate is there any reference to its role in liquidity management, which remains internal to the functioning of the RBI. “So the RBI is not obligated to act on the repo rate only in MPC.”
Also, changing the reverse repo rate is an unconventional policy tool that the RBI effectively deployed during the crisis when it went to a bottom instead of a hallway. Since the width of the political corridor acts as an independent instrument for the central bank in a crisis and an asymmetric corridor is a logical outcome in such a case.
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In addition, the RBI can “deflate the hype around the surge in reverse repurchase agreements in monetary policy by explaining the virtues of using the reverse repo change as a pure liquidity tool and not as a rating tool.” Because it can provide any amount of additional liquidity without pushing in the short term. forward money market rates below the policy rate.
So, the interest rate can be set to meet monetary targets, while the amount of liquidity in the banking system can be used to stabilize the financial market, Ghosh said.
She also noted that since the pandemic, the RBI has done exactly this balancing act and the pandemic is not yet over.
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“In this context, delaying normalization measures is prudent in the current situation, which would also give time for the economic recovery to strengthen further … the position must remain accommodative to support growth while the recovery remains uneven.
“Any instance of change at this point can disrupt markets affecting the nascent recovery,” argued Ghosh.
Another reason for the status quo is that the latest retail price inflation also indicates that the weighted contribution of domestic inflation has been declining since July and that imported inflation is increasing. Thus, the dynamics of inflation do not justify a change in the current direction of policy either.
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