RBI leaves rates unchanged

The Reserve Bank of India (RBI) on Friday kept policy rates unchanged but signalled a calibrated normalization of some of the crisis-time measures taken following the covid outbreak to gradually wean the economy off excess liquidity.

The central bank said it will gradually roll back a 100-basis-points cut in the cash reserve ratio (CRR), or the amount of cash that banks have to keep with RBI, potentially draining approximately ₹1.5 trillion of liquidity from the system. It, however, allowed banks access to ₹1.53 trillion of additional funds under the marginal standing facility (MSF).

Governor Shaktikanta Das said the normalization of CRR will create room for RBI to support the government’s massive borrowing programme announced in the Union budget by finance minister Nirmala Sitharaman.

The yield on the benchmark 10-year note rose four basis points to 6.11% after climbing to 6.15%, its highest since 28 August, as Das refrained from announcing a bond purchase calendar to help the market absorb the ₹12 trillion of bonds the government plans to sell in the year starting April. Das, however, assured that the central bank’s liquidity stance will continue to be accommodative.

“Bond markets are disappointed as there was an expectation for some decisive action like an OMO (open market operation) calendar to take away the shock of the additional ₹80,000 crore borrowing in the last two months of the fiscal. From the day of the budget to today, the 10-year G-Sec in a week has jumped 25 basis points from 5.90% to 6.15%,” said Sujata Guhathakurta, president and business head, debt capital markets-sales, Kotak Mahindra Bank.

Das described the market’s reaction to its policy normalization steps in January as “perceived market misconception” and assured there will be no immediate let-up in the easy liquidity stance even though RBI had conveyed its intention to exit from its ultra-loose liquidity stance in a phased manner in January.

It had even conducted a 14-day reverse repo auction for ₹2 trillion, which was seen as the first step towards normalization. Bond dealers said the market will keenly watch the steps RBI takes on the liquidity front.

“In the absence of significant credit growth, banks in many instances were keeping higher than the minimum limit under SLR with RBI, ” a senior banker said, seeking anonymity. Statutory liquidity ratio, or SLR, is the amount of funds banks have to keep in government securities.

On the macro front, RBI marginally raised the inflation forecast to 5-5.2% from 4.6-5.2% for the first half of the next fiscal year, but it drew comfort from slower food inflation, especially prices of vegetables which have moderated substantially.

RBI also upgraded its GDP growth estimate to 10.5% for the year starting 1 April, based on factors such as improved capacity utilization at factories and energy demand. It also cited resilient rural demand, an expected strengthening of demand in urban centres because of vaccination, decline in new covid cases, and acceleration of public investment for raising the forecast.