RBI may keep monetary policy accommodative, but continue to remove excess liquidity to prevent overheating

Central bank will likely keep an accommodative stance on monetary policy even in view of improving growth, while removing excess liquidity from the system to mitigate instability and risk.

RBI will likely keep an accommodative stance on the monetary policy even in view of improving growth, while removing excess liquidity from the system to mitigate instability and risk. (File photo: Reuters)

The Reserve Bank of India will likely keep an accommodative stance on the monetary policy even in view of improving growth, while removing excess liquidity from the system to mitigate instability and risk. The central bank will also take into account the uncertainty caused by the fast-spreading omicron variant rattling the global markets and hampering the path to recovery. “RBI will not change its stance till the (policy) corridor is not normal. By April, consensus is that we would have a normalized corridor,” Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank, told Financial Express Online.

Accommodative policy may continue till April-Jun

RBI governor Shaktikanta Das along with majority of the Monetary Policy Committee (MPC) members voted to maintain an accommodative stance in the December monetary policy. meeting, according to the minutes of the meeting published this week. But, the central bank may change its policy stance from accommodative to neutral between April and June next year once it hikes reverse repo rate by 40 basis points and normalizes the repo and reverse repo rate policy corridor, Upasna Bhardwaj said.

RBI managing high liquidity to mitigate instability

Meanwhile,the RBI is fine-tuning market operations to manage liquidity as it prepares for the path towards policy normalisation. Earlier in December, RBI increased the amount of variable rate reverse repo (VRRR) auctions to pump out excess liquidity from the market. Currently the system liquidity is hovering close to Rs 8 trillion+ while durable liquidity is around Rs 12 trillion, according to Madhavi Arora, Lead Economist at Emkay Global. “Consistently high system liquidity despite improving growth outlook could become counterproductive and will only increase asset inflation, financial sector instability in the medium term, the inflation risk premium as well as the term premium,” Madhavi Arora told Financial Express Online.

Treading cautiously

“Minutes do little to change our view that the RBI is likely to tread cautiously ahead,” Emkay Financial said in a note. “We think the RBI is unlikely to use any blunt tool to tighten liquidity and will prefer natural liquidity stabilizers. Even as indirect corridor normalization is on the anvil, the core monetary reaction function continues to hinge more on durable growth revival,” it added.

RBI had said it will maintain the accommodative stance “as long as necessary” to mitigate the impact of COVID-19 along with ensuring that inflation remains in control. In the minutes of the meeting, Das stressed on the need to have a firm understanding of the impact of the new variant before taking any action, stating that “the calibration and timing of a monetary policy response and preventing build-up of financial stability risks are very important in such an uncertain environment”.

RBI kept the repo rate at 4% and reverse repo rate at 3.35% in the December meeting, maintaining its accommodative stance. The committee is to meet next in February.

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