Month: August 2021

The Reserve Bank of India (RBI), on Friday, said it will conduct four variable reverse repo rate (VRRR) auctions in the fortnight beginning August 13 till September 24 to absorb surplus liquidity from the banking system.

The quantum of surplus liquidity with the banking system as on August 4 was ₹8.50-lakh crore.

The central bank will conduct fortnightly VRRR auctions of ₹2.5-lakh crore on August 13; ₹3.0-lakh crore on August 27; ₹3.5-lakh crore on September 9; and ₹4.0-lakh crore on September 24.

RBI Governor Shaktikanta Das underscored that 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 ₹4.0-lakh crore at September-end 2021. The amount accepted under the VRRR window forms part of system liquidity. Das observed that 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.

The central bank plans to conduct two more auctions of ₹25,000 crore each on August 12 and August 26, under the Government Security Acquisition Programme (G-SAP) 2.0.

Das said it is necessary to have active trading in all segments of the yield curve for its orderly evolution.

The RBI’s recent G-SAP auctions that have focussed on securities across the maturity spectrum are intended to ensure that all segments of the yield curve remain liquid, he added.

Furthermore, the central bank’s options are always open to include both off-the-run and on-the-run securities in the G-SAP auctions and Operation Twist.

Das expects the secondary market volumes to pick up and market participants to take positions that lead to two-way movements in yields.

GST compensation

The Governor said the decision of the government to accommodate the GST compensation payment to States for the first half of the year within the existing cash balances should assuage market concerns on the size of government’s borrowing programme this year.

The Reserve Bank of India (RBI) has revised upwards retail inflation projection for FY22 to 5.7 per cent from 5.1 per cent even as it retained the overall FY22 real GDP growth at 9.5 per cent.

The revised quarterly retail inflation projections are: 5.9 per cent in Q2 (5.4 per cent earlier projection); 5.3 per cent in Q3 (4.7 per cent); and 5.8 per cent in Q4 (5.3 per cent) of 2021-22.

In the June 2021 monetary policy review, the Q1 FY22 CPI inflation was projected at 5.2 per cent.

“The recent inflationary pressures are evoking concerns, but the current assessment is that these pressures are transitory and largely driven by adverse supply side factors,” said RBI Governor Shaktikanta Das.

Oil prices

Das observed that crude oil prices are volatile with implications for imported cost pressures on inflation.

He said the combination of elevated prices of industrial raw materials, high pump prices of petrol and diesel with their second-round effects, and logistics costs continue to impinge adversely on cost conditions for manufacturing and services, although weak demand conditions are tempering the pass-through to output prices and core inflation. The RBI has projected retail (Consumer Price Index) inflation for Q1:2022-23 at 5.1 per cent

While retaining the overall projection of real GDP growth at 9.5 per cent in 2021-22, the growth projection for Q1 was raised to 21.4 per cent (against earlier projection of 18.5 per cent), but the projections for the remaining three quarters were lowered.

The real GDP growth projection has been lowered to 7.3 per cent in Q2 (against earlier projection of 7.9 per cent); 6.3 per cent Q3 (7.2 per cent); and 6.1 per cent Q4 (6.6 per cent)

“Today, we are in a much better position than at the time of the MPC’s meeting in June 2021. 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,” said Das.

The Governor observed that RBI’s 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.

Real GDP growth for Q1:2022-23 has been projected at 17.2 per cent.

“Since the start of the pandemic, the MPC has prioritised revival of growth to mitigate the impact of the pandemic.

“The available data point to exogenous and largely temporary supply shocks driving the inflation process, validating the MPC’s decision to look through it,” said Das.

The Governor noted that supply-side drivers could be transitory while demand-pull pressures remain inert, given the slack in the economy.

He emphasised that a pre-emptive monetary policy response at this stage may kill the nascent and hesitant recovery that is trying to secure a foothold in extremely difficult conditions.