{"id":152000,"date":"2021-12-09T20:33:10","date_gmt":"2021-12-09T15:03:10","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=152000"},"modified":"2021-12-09T20:33:10","modified_gmt":"2021-12-09T15:03:10","slug":"rbi-must-tackle-surplus-liquidity-on-way-to-policy-normalisation","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/rbi-must-tackle-surplus-liquidity-on-way-to-policy-normalisation\/","title":{"rendered":"RBI must tackle surplus liquidity on way to policy normalisation"},"content":{"rendered":"\n

News: <\/strong>Recently, the Monetary Policy Committee (MPC) voted to maintain status quo on policy rates.<\/strong><\/p>\n

Some of the key decisions that were taken at the recent the Monetary Policy Committee<\/a><\/strong><\/span> meeting are –<\/p>\n

–<\/strong> The repo rate is maintained at 4% and the reverse repo rate at 3.35%.<\/p>\n

–<\/strong> Forecasts of FY22 GDP growth and CPI inflation are retained at 9.5% and 5.3%.<\/p>\n

–<\/strong> The RBI chose to maintain an accommodative policy stance, while many expected that RBI would move towards policy normalisation.<\/p>\n

Why many experts were in support for a policy change?<\/strong><\/h5>\n

Excess liquidity: <\/strong>Since the onset of the Covid-related lockdowns, RBI had injected an unprecedented amount of funds into banks and other intermediaries. This resulted in an excess liquidity in the financial system.<\/p>\n

Inflationary pressure<\/strong>: Average inflation in the last fiscal was 6.2%, which is above RBI\u2019s target range of 4-6%. Latest numbers (October 2021) show wholesale price inflation at 12.54%.<\/p>\n

International trend<\/strong>: The world over, policymakers are realizing that the limits of easy monetary policy have been reached and further easing is not sustainable. For Instance,<\/p>\n

–<\/strong> Fed Tapering by the US Federal Reserve,<\/p>\n

–<\/strong> BRIC economies like Brazil, Russia and South Africa have done a course correction,<\/p>\n

IMF caution<\/strong>: The International Monetary Fund has warned the \u201cEmerging markets,\u201d stating that, tightening by advanced economies can cause capital outflows and exchange rate pressures.<\/p>\n

Why RBI\u2019s decision to maintain accommodative policy stance is being criticised?<\/strong><\/h5>\n

MPC’s rationale is weak<\/strong>: Growth is really weak, and it needs a lot of support. However, considering India\u2019s economic recovery trends, MPC\u2019s judgement seems to be unsound.<\/p>\n

Conditions are improving<\/strong>: The prospects for economic activity are steadily improving, including for contact-intensive services that were hit hard by the pandemic.<\/p>\n

–<\/strong> The production of capital goods remained above the pre-pandemic level<\/strong> for the third month in a row during September.<\/p>\n

–<\/strong> Imports of capital goods increased<\/strong> by double digits during October for the eighth consecutive month<\/p>\n

In such a scenario, where the growth prospects are promising, the decision by the MPC to support the growth by ignoring rising prices has been criticised.<\/p>\n

What steps has RBI taken to control the excess liquidity in the system?<\/strong><\/h5>\n

RBI has dynamically used multiple instruments to absorb the excess liquidity over the course of the year.<\/p>\n

Firstly,<\/strong><\/em> Post the October MPC meeting, RBI had stopped buying bonds under the Govt Securities Asset Purchase (GSAP) and done negligible Open Market Operations<\/a><\/strong><\/span> (OMOs). It has restricted the addition of voluntary liquidity injection into the system.<\/p>\n

Secondly,<\/strong><\/em> RBI has used the 14-day variable reverse repo rate<\/a><\/strong><\/span> (VRRR) auctions window to absorb almost all this liquidity surplus from banks.<\/p>\n

Thirdly,<\/em> <\/strong>RBI has again allowed banks the option to prepay the outstanding borrowings from the Targeted Long Term Repo Operations<\/a><\/strong><\/span> (TLTROs), thereby potentially extracting another Rs 70,000 crores.<\/p>\n

Fourthly,<\/strong><\/em> RBI has tightened the amount that banks can borrow under its marginal standing facility to 2% of their net demand and time liabilities from 3% earlier.<\/p>\n

What is the way forward?<\/strong><\/h5>\n

Firstly,<\/em><\/strong> there is a likelihood of further increase in liquidity, largely through foreign currency funds inflow, particularly in FY23. So, there might be a need for other instruments to absorb these surpluses apart from VRRR auctions.<\/p>\n

Secondly,<\/strong><\/em> RBI should shift to the tightening phase, with hikes in the repo rate followed by a change in stance from \u201caccommodative\u201d to \u201cneutral\u201d.<\/p>\n

Source:<\/strong> This post is based on the article \u201cRBI must tackle surplus liquidity on way to policy normalisation<\/strong>\u201d & “RBI\u2019s peculiar path to policy normalization<\/strong>” & “Monetary Policy Committee fails to read the signals right\u2026 Again!<\/strong>” published in Indian Express, Livemint<\/strong> on 9th<\/sup> Dec<\/strong> 2021<\/strong> respectively.<\/p>\n","protected":false},"excerpt":{"rendered":"

News: Recently, the Monetary Policy Committee (MPC) voted to maintain status quo on policy rates. Some of the key decisions that were taken at the recent the Monetary Policy Committee meeting are – – The repo rate is maintained at 4% and the reverse repo rate at 3.35%. – Forecasts of FY22 GDP growth and… Continue reading RBI must tackle surplus liquidity on way to policy normalisation<\/span><\/a><\/p>\n","protected":false},"author":10316,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[216,10500,10501],"class_list":["post-152000","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-gs-paper-3","tag-indian-express","tag-live-mint","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704826355},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/152000","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10316"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=152000"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/152000\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=152000"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=152000"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=152000"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}