MUMBAI: Leading up to its next policy announcement, the Reserve Bank of India (RBI) has stepped up liquidity draining operations, signalling that while the central bank may tolerate overnight rates aligning with the repo rate after six months, it is not comfortable with financial conditions turning any easier than that.
Over the past four days, the RBI has carried out six rounds of short-term variable rate reverse repo (VRR) auctions that help mop up surplus funds from the banking system. Most of the VRRR auctions have been overnight operations, implying that funds are absorbed by the RBI for a day before the central bank repeats the exercise.
The past week’s movement of money market rates — a key channel through which the RBI aims to transmit its rate changes across the economy — provides hints to the central bank’s thinking. By draining out excess funds that have flowed to some banks following government spending and dollar inflows into capital markets, the RBI has signalled its intent to ensure that the cost of funds stays near the repo rate. This comes at a time when speculation has been building that the RBI may signal a softer tone on liquidity at the policy statement on Thursday.
However, given that inflation remains above the RBI’s target of 4%, the central bank may not want money market rates to soften much.
“Having the market rate settle somewhere close to 6.50% would be something that the RBI would be aiming for now. Liquidity was extremely tight in January, which is when the RBI stepped in through the VRR auctions and pumped in money and now when additional funding from the government has come in, they are taking that out,” said Rajeev Pawar, head of treasury, Ujjivan Small Finance Bank.
The effective market rates over the past week have fallen the way they theoretically would have if the RBI had cut rates by 25 basis points.
After largely remaining around 20-25 basis points higher than the prevailing repo rate of 6.50% since August, the weighted average call rate (WACR) and rates on other money market instruments such as tri-party repos and interbank repos have eased to or below the repo rate this week. The RBI officially aims to align the WACR with the repo rate through liquidity management.
Source: The Economic Times
The post RBI Steps Up Auctions To Drain Liquidity first appeared on Latest India news, analysis and reports on IPA Newspack.
Follow Arabian Post
Select Arabian Post as your preferred source on Google and MSN News for trusted business news and Arab politics and updates.
