Liquidity conditions will likely remain tight in coming months as the Reserve Bank of India (RBI) on Thursday said it would actively manage the same, as it sees a correction in the foreseeable future, aided by its market operations.
Market players believe that the apex bank has taken this position as it wishes to see the call rate closer to the repo rate of 6.5%. “While liquidity deficits could improve over the coming weeks with a likely rise in government spending, the rise in currency in circulation ahead of the general elections and seasonal factors could keep liquidity condition tight over the coming months,” HDFC Bank said in a post-policy report.
On Thursday, RBI’s monetary policy committee decided to keep the repo rate at 6.5%, while retaining the stance of withdrawal of accommodation. Subsequently, the standing deposit facility remains at 6.25% and marginal standing facility at 6.75%.
Many economists had expected the central bank to unveil measures to address the liquidity deficit. But instead, the central bank said it has observed rapid changes happening in the liquidity scenario, so it will deploy a mix of instruments to modulate both frictional and durable liquidity so as to ensure that money market interest rates evolve in an orderly manner and financial stability is maintained.
The RBI has also differentiated between policy stance and liquidity measures being taken. “Our stance of withdrawal of accommodation should be seen in the context of incomplete transmission and inflation ruling above the target of 4% and our efforts to bring it back to the target on a durable basis,” governor Shaktikanta Das sad in his statement, adding that so far as liquidity conditions are concerned, these are being driven by exogenous factors, which are likely to correct in the foreseeable future, aided by our market operations.
RBL Bank economist Achala Jethmalani sees the policy as ‘actively disinflationary’ while staying nimble in its liquidity management approach.
In the post-policy press conference, deputy governor Michael Patra reiterated the RBI intention to keep the weighted average call rate around the repo rate.
After remaining in surplus during April-August 2023, the system-level liquidity turned into deficit from September after a gap of four-and-a-half years. The deficit narrowed to Rs 1.4 trillion as on February 7 from Rs 3.1 trillion as on December 29. But the RBI noted that when adjusted for government cash balances, the potential liquidity in the banking system is still in surplus.
The central bank remains nimble and flexible in its liquidity management through two-way main and fine-tuning operations, in both repo and reverse repo. It had conducted variable rate reverse repo auctions between February 2 and February 7 to absorb surplus liquidity. Going ahead, it will continue with its market operations to correct liquidity conditions.
The RBI has communicated nimbleness to address both frictional and durable liquidity instead of disrupting monetary policy coordinates, which suggest delinking liquidity from stance, say economists.
“The focus on necessity of inflation to settle closer to 4% remains intact, suggesting the RBI continues to remain cautious on inflation,” said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank. “We continue to expect the RBI to fine-tune liquidity conditions to manage the overnight to inch towards the repo rate. The change in stance could follow towards end of 1QFY25, and subsequently, shallow rate cuts starting in 2HFY25.”