Amit Balooni

How RBI is calibrating its Liquidity Management strategy?

In Feb 22 bimonthly monetary policy announcement, #RBI maintained the policy rates , signaling a pro-growth orientation. The underlying, of course, was the expectation of downward inflation trend and an explanation that the recent inflationary pressures were driven by supply side issues, which seem to be coming under control.

However noteworthy is the calibration of liquidity management strategy that RBI has adopted and the Governor highlighted without ambiguity.

Since May 21, RBI has maintained #ReverseRepo(RR) (rate as which Bank park their excess with RBI) at 3.35%, which is 65bps below #Repo(4%…rate at which banks borrow from RBI). Higher difference between the two means RBI wants banks to lend more. Alternatively higher RR means RBI is trying to reduce the liquidity. Historically this difference was maintained at 25bps.

However, lending rates are also determined by available liquidity. RBI can simply reduce liquidity by increasing RR. Note that RR is a daily window. But instead RBI now uses occasional #VRRR auctions at rates much higher than RR on need basis, thereby sucking the liquidity beyond the RR window.

So essentially we should benchmark the *Real RR rate* which factors VRRR auction rates. This Real RR has increased from 3.67 in Aug 21 to 3.87 in Feb 22.
Therefore the real difference between Repo and Real RR is effectively 13 BPS, which is a relatively narrow band.

Now you know why some banks increased rates. even though policy rates remained same.

In short, RBI is balancing the overall pro growth messaging (also called dovish stance) by keeping the policy rates same while managing inflationary challenges with need based interventions.


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