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Reserve Bank of India starts tightening liquidity tap

The central bank held the key repo and reverse repo rates unchanged and retained its accommodative stance as the economic recovery is in its early stages.

Our Special Correspondent   |   Mumbai   |   Published 09.10.21, 01:12 AM

The Reserve Bank of India (RBI) on Friday suspended a bond acquisition programme (G-SAP) and increased the limit of an instrument — variable rate reverse repo (VRRR), as the apex bank took the first steps towards tightening the liquidity tap.

The central bank however held the key repo and reverse repo rates unchanged and retained its accommodative stance as the economic recovery is in its early stages.


While all the six members of the monetary policy committee (MPC) unanimously voted to keep the repo rate unchanged, five of them supported the accommodative stance. Prof Jayanth Varma of IIM Ahmedabad was the lone dissenting voice.

RBI governor Shaktikanta Das said since the beginning of the pandemic the central bank has maintained ample surplus liquidity to support a speedy and durable economic recovery. Das said the potential liquidity overhang is more than Rs 13 lakh crore, which is adequate to meet the needs of a resurgent economy.

As a first step, the RBI said it was suspending the Government Securities Acquisition Programme or G-SAP through which it purchased bonds from banks thereby infusing liquidity into the system. RBI bought bonds of Rs 2.2 lakh crore in the first half of this fiscal through G-SAP.

The RBI also announced that it is increasing the size of the variable rate reverse repo (VRRR) auction. In the previous policy, the size of these auctions were raised to Rs 4 lakh crore per auction.

This will now be increased to Rs 6 lakh crore per auction by December 3, 2021 in the following manner: Rs 4 lakh crore as already notified; Rs 4.5 lakh crore on October 22; Rs 5 lakh crore on November 3; Rs 5.5 lakh crore on November 18; and Rs 6 lakh crore on December 3.

The Reserve Bank  may also consider complementing the 14-day VRRR auctions with 28-day variable reverse repo auctions in a similar calibrated fashion.

Growth forecast

The RBI has maintained 2021-22 growth target at 9.5 per cent. This comes on the back of a 7.3 per cent contraction in the previous year.

The growth for 2022-23 is projected at 7.8 per cent, which is a full percentage point higher than the median growth projection of professional forecasters polled by the RBI at 6.8 per cent.

Inflation outlook

CPI (consumer price index) inflation is projected at 5.3 per cent for the fiscal, down from the earlier forecast of 5.7 per cent and within the target level of 4 per cent plus or minus 2 per cent.

Watch on Big Tech

Deputy governor M. Rajeshwar Rao on Friday said the RBI is examining whether deposit acceptance by Google and Amazon is within the prescribed laws and regulations, at a time concerns about big tech firms’ play in the financial space are at a heightened level.

Both Google Pay and Amazon have announced partnerships with lenders to accept deposits in the country through their mobile  apps.

“We are examining the issue regarding the regulatory implications, having regard to the applicable laws and the regulations that are prescribed for the thing. So, we are examining it,” Rao said.

Sensex surges

The Sensex soared past the 60000-level while the Nifty finished at an all-time high on Friday after the RBI kept the key interest rates unchanged . 

The Sensex jumped 381.23 points or 0.64 per cent to close at 60059.06, just shy of its lifetime high.

The NSE Nifty rose 104.85 points or 0.59 per cent to its fresh closing peak of 17895.20.

At the bond markets, yield on the benchmark 10-year security rose to a day’s high of 6.32 per cent. It later settled at 6.318 per cent compared with the last close of 6.267 per cent.

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