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The Reserve Bank of India (RBI), as expected, did not make any change in the repo rate. However, the RBI governor again emphasized that the yield curve is a public good. The markets perhaps were expecting immediate announcements on liquidity management and, thus yields, reacted adversely.

In Indian markets, it is common to find debt market players behaving differently to RBI signalling. If one set of players acts pro-cyclically with the RBI monetary policy stance, the other set might act counter-cyclically, while sometimes both act combatively. This often makes it difficult for RBI to allow the pass-through of the signalling mechanism. This also results in the yield structure not being in sync with macro fundamentals many times in the market. In economic parlance, public goods are defined as non-excludable and non-rival in nature, like as in law enforcement. There is plenty of literature on the use of public goods that show that if market players cooperate all players will have the opportunity to benefit, but if they work in isolation all are likely to suffer. Fortunately, RBI under the current dispensation with its explicit forward guidance seems to have managed the art of managing expectations better as RBI auction outcomes are turning out to be mostly in line with market expectations.

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RBI has now extended the on-tap targeted long-term repo operations issued by entities in 26 eligible stressed sectors to non-banking financial companies. The normalization of the cash reserve ratio (CRR) will drain approximately 1.5 trillion of liquidity from the system and will create room for RBI to do more open market operations to support government borrowing. RBI has also extended the facility to avail funds under the marginal standing facility (MSF) by dipping into the statutory liquidity ratio (SLR) till 30 September 2021.

For banks, RBI has extended the enhanced held to maturity (HTM) limit of 22% (from 19.5%) of the net demand and time liabilities (NDTL) till 31 March 2023. Banks have been allowed to deduct credit disbursed to ‘new MSME borrowers’ from their NDTL for calculation of CRR only for exposures up to 25 lakh per borrower. We expect banks will be able to potentially give around 23 trillion fresh loans to MSMEs till end September 2021. RBI has also deferred the implementation of the last tranche of the capital conservation buffer along with the net stable funding ratio guidelines. This can have a capital ease of around 65,000 crore.

The policy has many firsts and innovative announcements. As a major structural reform, RBI has now allowed retail investors to buy and sell government securities (G-secs) in both primary and secondary market directly through an online portal called Retail Direct. Retail investors do not make a significant contribution to trading activity in the market but as long-term investors, they impart stability to the market. The option to directly invest in defaulted corporate bonds will widen the market, given a market-based assessment of recovery rate and loss given default (LGD) and provide a faster exit route for bondholders.

RBI has taken several steps to build up consumer confidence in digital transactions such as setting up a centralized industry-wide 24x7 helpline for addressing customer queries about digital payment products and giving information on grievance redress mechanisms. However, the helpline should also have basic facilities related to all banks at one go, like blocking ATM cards of any bank and freezing any bank account immediately to stop frauds. Also, to make the ombudsman mechanism simpler and more responsive, RBI will integrate all ombudsman schemes and introduce centralized processing of grievances following a ‘One Nation One Ombudsman’ approach. RBI has also proposed to bring all 18,000 non-clearing bank branches under CTS clearing by September.

In the end, RBI’s liquidity management reminds us of the familiar game of “chicken". Large fiscal deficits cause game of “chicken’ like situations. Thus, if the central bank pursues its monetary objectives by not accommodating the debt financing in its strategy calculations, the macroeconomic outcome may be inferior for the economy. RBI has rightly chosen to keep liquidity in extended surplus mode for an extended period. This is policymaking for public good!

Soumya Kanti Ghosh is group chief economic advisor, State Bank of India. Views expressed are personal

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