Variable rate reverse repo auctions indicate monetary tightening, say analysts

The decision of Reserve Bank India (RBI) to conduct four variable rate reverse repo (VRRR) auctions to absorb excess liquidity from the banking system could be the beginning of its imminent exit from unconventional monetary easing, said bankers and analysts.

“The RBI policy is pragmatic and strikes a fine balance between stance and strategy. While the policy stance continues to be accommodative to continuously support growth, a strategy of careful recalibration of liquidity management is clearly indicated with the roll-out of VRRR,” said State Bank of India Chairman Dinesh Kumar Khara.

“The policy has also nudged banks to shift to an alternate reference rate with the discontinuation of LIBOR. The extension of on-tap TLTRO scheme and the deferral of deadline for meeting the operational parameters for stressed entities will help corporates navigate through the pandemic with a degree of certainty,” he added.

Crisil said RBI’s announcement of greater absorption of surplus liquidity through VRRR operations “could be read as the beginning of its imminent exit from unconventional monetary easing.”

The agency said the RBI had reiterated its support to economic recovery as of now by maintaining low rates and conducive financial conditions. “However, with growth expected to gain momentum in the second half of this fiscal, and inflation remaining elevated, we expect monetary policy to tighten in the coming months,” Crisil said.

“The U.S. Federal Reserve is also expected to begin tapering bond purchases by end-2021, further reducing scope for the RBI to continue its present policy stance. We therefore, expect a hike in repo rate by 25 basis points (bps) by end-fiscal 2022,” it added.

Uday Shankar, president, FICCI, said the RBI’s decision to continue with the accommodative stance, until necessary, to revive growth, was comforting when there was an expectation about the normalisation of the monetary policy.

“The central bank has thoughtfully navigated the monetary policy through the pandemic. We are confident that the same thoughtfulness will continue in the future, especially in view of an anticipated third wave and the continuing softness in the economy,” he said.

“On the economic front, despite the uptick, we believe that it is important that a stimulus is provided by the government to give a thrust to consumption. The timing of such measures will be apt at this juncture as the festive season is about to begin,” he added.