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MUMBAI : The Reserve Bank of India announced the first long term auction to absorb liquidity, taking the first step towards normalization of its liquidity adjustment policies and a potential reverse repo rate hike before the end of the year.

The central bank on Wednesday said it will conduct the 28 day variable reverse repo auction worth 50,000 crore on 2 November. It also announced a 7-day VRRR, albeit the quantum has been reduced to 1.5 trillion from 2 trillion earlier.  

So far, the RBI has absorbed liquidity using both 7 day and 14-day VRRR auctions, which are typically seen as short-term liquidity management tools.  

In its October policy, RBI had announced an increase in the quantum of 14-day VRRR auction to 6 crore and the option of 28 day VRRR auction. “Further, depending upon the evolving liquidity conditions – especially the quantum of capital flows, pace of government expenditure and credit offtake – the RBI may also consider complementing the 14-day VRRR auctions with 28-day VRRR auctions in a similar calibrated fashion," said RBI in its 8 October policy.  

While the bond market was expecting a 28 day VRRR, traders are hardly enthused as they believe that it is not going to make any impact besides the sentiment.  

 “Till the time the market has the option of 7 day and 14 day VRRR, it is going to be lower tendering in 28 day VRRR. It’s not going to be effective unless RBI stops 7 day VRRR. It’s just one indication that they want to drain out durable liquidity," said Naveen Singh, head of trading, ICICI Securities Primary Dealership.

According to Kaushik Das, chief economist at Deutsche Bank, this is the clearest signal from RBI that the central bank now wants to transition into dealing with liquidity management on a durable basis, albeit in a staggered and non-disruptive manner. “This was the intermittent stage that we were waiting for RBI to signal, before starting the lift off of reverse repo rate in the 8th Dec’21 policy. Now with longer-tenor VRRR becoming operational, we are more confident of our call of a reverse repo rate liftoff starting from Dec’21 monetary policy," Das said.  

Deutsche Bank is expecting a 25 basis points hike in reverse repo rate to 3.55% in December.  

But there are economists like Aditi Nayar, chief economist at ICRA who believe that the monetary policy committee is unlikely to act until next year. “None of the MPC members are showing the urgency to act. We continue to believe that the MPC will look through the supply side factors that are pushing up inflation, and change the stance only after there is clear evidence of a demand revival stoking prices upwards. This is unlikely until the February 2022 policy review. Moreover, the RBI may refrain from hiking the reverse repo rate, until the MPC changes the stance to neutral," she said.

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