Monetary policy committee: RBI holds key rates to boost recovery

Illustration: Ajay Mohanty
The Reserve Bank of India (RBI) on Wednesday kept its key policy repo rate and “accommodative” stance unchanged, and said it would lean more on the variable rate than its traditional fixed-rate liquidity absorption facility to drain out excess liquidity from the banking system.

Many economists saw it as a stealth reverse rate hike, even as the central bank kept its reverse repo rate untouched at 3.35 per cent.

However, by activating most of the money absorption through the 14-day variable reverse repo rate (VRRR) window, complemented by the 28-day reverse repo, the traditional fixed rate reverse repo tool is practically redundant now, economists said.

The RBI used the VRRR tool to remove Rs 6 trillion from the banking system by December 3. Now, this will be enhanced to absorb Rs 6.5 trillion on December 17; and further to Rs 7.5 trillion on December 31.

“Consequently, from January 2022 onwards, liquidity absorption will be undertaken mainly through the auction route,” RBI Governor Shaktikanta Das said in his streamed policy statement.

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This may push up short-term rates in the system from January, economists said.

Following the last policy of this calendar year, the repo rate remained at 4 per cent, the reverse repo rate at 3.35 per cent, and the stance “accommodative”. But the RBI tweaked the marginal standing facility (MSF), which banks use for liquidity support during emergencies, to allow borrowing up to 2 per cent of the deposit base from 3 per cent allowed during the pandemic days. The monetary policy committee (MPC) members voted to maintain the repo rate, but external member Jayanth Varma continued to vote against the stance.


The six-member MPC said the momentum of economic activity was gaining further traction, aided by the expanding vaccination coverage and rapid subsiding of new infections.

The agricultural sector is showing good promise while the urban demand and contact-intensive services activities are rebounding on improving consumer optimism, supported by festival demand. Exports have picked up pace, while non-oil, non-gold imports reflected demand revival. The Omicron variant of the coronavirus, however, posed a challenge.

“Our overarching priority and focus now is supporting growth and reviving growth, but maintaining price stability is also our concern along with financial stability as we are an inflation-targeting central bank,” Das said.

“Overall, the recovery that had been interrupted by the second wave of the pandemic is regaining traction, but it is not yet strong enough to be self-sustaining and durable. This underscores the vital importance of continued policy support.”

The RBI retained its overall growth forecast for the fiscal at 9.5 per cent, and inflation at 5.3 per cent while adjusting some of the quarterly numbers.

“In the current situation, it is important to keep inflation aligned with the target while focusing on a robust growth recovery,” Das said. 

Deputy Governor Michael Patra said the jury was out on the issue of a perk-up in inflation being durable or transitory. Headline retail inflation in India for now is comfortably within the target range, and the MPC will take that as a metric. The sticky core inflation rate (non-oil, non-food) should start declining. The fuller effects will last a full year, giving time to the authorities to bring down inflation.

Stealth hike

The VRRR facility, which is now touching almost the repo rate of 4 per cent in liquidity auctions, offers more incentive to banks to park their excess cash, whereas a fixed-rate auction offers them the reverse repo rate, which was left unchanged at 3.35 per cent. This ensures enthusiastic participation by banks to park their excess money to earn a higher return on idle cash.

In a Business Standard poll, six out of 16 participants had expected a reverse repo hike by the RBI.

“The central bank essentially delivered a ‘stealth tightening’, by announcing that liquidity absorption from January 1, 2022, will be mainly through the auction route,” said Kaushik Das, chief economist of Deutsche Bank. 

Similar sentiment was echoed by HSBC Chief Economist Pranjul Bhandari. If the auction ends up lowering the excess liquidity, “it could push the interbank call money rate up. And if that is indeed the case, it can be argued that the RBI has tightened by stealth in today’s policy meeting”, Bhandari said. 

Regulatory measures

The central bank will seek public opinion through a discussion paper about payment system charges, as these should be “reasonable and should not become a deterrent in the adoption of digital payments.” 

It will also allow small-value transactions through an on-device wallet in the unified payments interface (UPI) application. Basic feature phones can be used to transfer funds using the UPI, while the transaction limit for specific charges, such as initial public offers and for investment in retail direct platform, was increased to Rs 5 lakh from Rs 2 lakh earlier.

Among other measures, the central bank said banks no longer needed to take permission from it about what to do with the overseas profits. It will also bring out a discussion paper on reviewing the investment norms of banks.

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