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The Reserve Bank of India on Friday halted its bond-buying efforts, signalling it’s likely to begin scaling back pandemic-era easy money policies, although governor Shaktikanta Das stressed that nothing would be done to “rock the boat" as a nascent economic recovery takes hold.

“Our entire approach is that of gradualism. We don’t want suddenness, surprise," Das said after the RBI’s bi-monthly monetary policy meeting. “We do realize that as we are approaching the shore; when the shore is so close, we don’t want to rock the boat because we realize there is a life, there is a journey beyond the shore".

For now, the central bank’s rate-setting panel kept interest rates unchanged and maintained its accommodative policy stance.

This is the eighth time in a row that the monetary policy committee (MPC) headed by Das has maintained status quo.

However, Das said that the central bank will suspend the government securities acquisition programme (GSAP), its version of quantitative easing.

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RBI had injected total liquidity worth 2.37 trillion during the first six months of the year through open market operations (OMOs), including GSAP, compared with an injection of 3.1 trillion in the previous year.

Bond market investors were surprised as they were expecting RBI to only reduce the quantum of GSAP purchases.

RBI also proposed to conduct 14-day variable rate reverse repo (VRRR) auctions every fortnight, from the current 4 trillion to 6 trillion in stages by December.

The central bank said it could consider introducing 28-day VRRR auctions, depending on the evolving liquidity conditions.

Economists said that this is a signal that RBI is preparing the market for an increase in the reverse repo rate.

“Barring a third covid wave, we see scope for reverse repo rate to be gradually raised, which is likely to be followed by a change in stance. Repo rate hikes, in our view, are only likely to be considered in the second half of 2022, at the earliest,“ said Radhika Rao, chief economist, DBS.

On growth, Das acknowledged the ongoing normalization in high-frequency economic indicators, including the more adversely affected contact-intensive services sector.

However, he noted that output is still below the pre-pandemic level, and the recovery remains uneven and dependent on continued policy support.

The MPC, therefore, kept the gross domestic product (GDP) growth forecast unchanged at 9.5% for FY22.

On inflation, RBI is more comfortable about the path of inflation than it was in August, despite the recent increases in global commodity prices. The central bank has cut its retail inflation forecast to 5.3% for the current financial year from 5.7% earlier.

Bond markets reacted sharply, with the benchmark 10-year government bond yield rising to the highest in more than a year, while the local currency fell to a six-month low.

The 10-year government bond yield rose to 6.31% in afternoon trading, and the rupee breached the 75-mark against the dollar.

“With the status quo on rates amid a pause in the GSAP programme, we now expect the 10-year G-Sec yield to range between 6.25-6.4% in the remainder of this quarter, unless there is a substantial magnitude of OMO purchase in this bucket, and crude oil prices recede under $70 a barrel," said Aditi Nayar, chief economist at ICRA Ltd.

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