The RBI Governor outlined measures to tackle the liquidity deficit in the system in the monetary policy announcement stating that it is temporary and should be seen in the context of large potential liquidity arising from higher government spending in the latter half of the fiscal year.
He said that the further drawdown of excess CRR and SLR by banks can augment system liquidity.
The Reserve Bank uses the variable rate reverse repo rate (VRRR) auctions of longer maturity to balance out surplus liquidity in the system.
The Governor said that the surplus liquidity in the system moderated to Rs 2.3 lakh crore during August-September up to (September 28) from Rs 3.8 lakh crore in June-July as shown by the daily absorption through the LAF corridor taking into account the SDF and VRRR auction.
“Overall system liquidity remained in surplus, with the average daily absorption under the liquidity adjustment facility (LAF) easing to Rs 2.3 lakh crore during August-September (up to September 28, 2022) from Rs 3.8 lakh crore in June-July. Money supply (M3) expanded y-o-y by 8.9 per cent, with aggregate deposits of commercial banks growing by 9.5 per cent and bank credit by 16.2 per cent as on September 9, 2022. India’s foreign exchange reserves were placed at US$ 537.5 billion as on September 23, 2022.”
Advance tax payments along with GST and forex outflows led to moderation in systemic liquidity, the governor outlined. The moderation in liquidity led to banks taking recourse to MSF facility and liquidity injection by the RBI through VRR auctions to augment the liquidity requirements.
The governor said that the weighted average call rate, the operating target of monetary policy, has increased by 196 basis points during the current financial year. The increase in call rate is in sync with the actions conducted by the RBI on the SDF and the repo rate. This has led to increase in interest rates across the financial markets spectrum.
The governor highlighted that the Indian rupee has fared better that many of its peers as the US dollar appreciated by 14.5% while the Indian rupee depreciated by 7.4% since the start of the current fiscal in an orderly manner. He said that the RBI does not aim a particular level for exchange rate and will intervene in the forex market only to curb volatility.
The RBI hiked the repo rate by 50 basis points today taking the benchmark interest rates to 5.9 per cent and continued with the withdrawal of accommodation stance.
It was expected that the RBI will change its stance to neutral from “withdrawal of accommodation” considering the liquidity moderation in the system but it has maintained the status quo as it focuses on inflation control while supporting growth.
It slashed the economic growth forecast to 7 per cent from 7.2 per cent and retained the inflation projection at 6.7 per cent in the policy review.
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