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MUMBAI : Reserve Bank of India (RBI) governor Shaktikanta Das on Tuesday said that the central bank will conduct fine-tuning operations to manage unanticipated liquidity flows. The variable rate reverse repo (VRRR) auction will remain the main instrument to absorb excess liquidity from the banking system, Das said. 

“As markets settle down to regular timings and functioning and liquidity operations normalize, the Reserve Bank will also conduct fine-tuning operations from time to time as needed to manage unanticipated and one-off liquidity flows so that liquid conditions in the system evolve in a balanced and evenly distributed manner," said Das at a conference organised by Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Primary Dealers’ Association of India (PDAI). 

Das also highlighted that RBI and the government are making efforts to enable international settlement of transactions in G-Secs through international central securities depositories (ICSDs). This will enhance access of non-residents to the G-Sec markets as well as the inclusion of India in the global bond indices, for which efforts are ongoing, he said.

The market should aim to introduce new instruments to facilitate hedging of long-term interest rate and reinvestment risk by market participants such as insurance companies, provident and pension funds and corporates, Das said. 

The secondary market liquidity, as measured by the turnover ratio, is often relatively low and tends to remain concentrated in a few securities and tenors, he said. 

“The yield curve accordingly displays kinks, reflecting the liquidity premium commanded by select securities / tenors. To a certain extent, this is the result of the market microstructure in India, dominated as it is by ‘buy and hold’ and ‘long only’ investors. We need to develop a yield curve that is liquid across tenors," said Das. 

In the previous monetary policy in August, RBI had kept policy rates unchanged and maintained an accommodative policy stance. One of the six Monetary Policy Committee (MPC) members, Jayant Varma, had suggested normalizing the highly accommodative stance with the raising of the reverse repo rate. 

The current level of the reverse repo rate is no longer appropriate, Varma had said, and called for a “gradual normalization" of the width of the policy corridor or the difference between the repo and the reverse repo rate. 

The interest rate derivatives (IRD) market has developed over the years with the availability of a wide range of products. The only major liquid product is the Mumbai Interbank Offer Rate-based Overnight Indexed Swaps market.

Inflationary pressures are beginning to show signs of greater persistence than anticipated earlier, Varma had observed. Inflation for fiscal year 2021-22 is forecast to be around 5.7%.

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