RBI Policy: Das Says Rate Stance Clear, but Transmission Incomplete
Das had explained that the according to RBI Policy, RBI aimed to maintain liquidity at a level that would keep the overnight call rate, the operational target of the monetary policy, in proximity to the repo rate.
On Thursday, Reserve Bank of India (RBI) Governor Shaktikanta Das stated that the monetary policy stance, termed as “withdrawal of accommodation,” pertained to interest rates. He emphasized the importance of considering incomplete transmission and the inflation rate consistently exceeding 4 percent.
“Our stance of withdrawal of accommodation should be seen in the context of … our efforts to bring it back to the target on a durable basis,” said Das in his monetary policy statement.
Das provided further details on liquidity conditions, attributing them to external factors. He anticipated their improvement in the near future, supported by market interventions from the central bank.
He stated that the RBI is adaptable and swift in managing liquidity, utilizing both repo and reverse repo operations. Das emphasized the RBI’s commitment to employing a balanced mix of tools to regulate short-term and long-term liquidity, ensuring the systematic evolution of money market interest rates while maintaining financial stability.
Aurodeep Nandi, an economist at Nomura, remarked, “Das has emphasized the RBI’s agility in addressing both frictional and enduring liquidity without disrupting monetary policy coordinates, thus unlinking liquidity from stance.”
Das had previously clarified that the RBI would strive to maintain liquidity at a level where the overnight call rate, the operational target of monetary policy, stay around the repo rate.
Abheek Barua, chief economist at HDFC Bank, observed, “Regarding liquidity, the central bank appeared to indicate that liquidity deficits were largely temporary, while enduring liquidity remained relatively comfortable. It refrained from announcing any new measures, affirming its commitment to managing liquidity through precision operations such as variable rate repo and reverse repo auctions.”
Market expectations leaned towards a potential shift in the stance of the monetary policy committee (MPC), given the ongoing variable rate auctions conducted by the RBI. Leading up to the MPC’s decision, market participants speculated that the continuous infusion of liquidity by the RBI might prompt a transition from the current “withdrawal of accommodation” stance to a “neutral” one.
Alok Singh, group head (treasury) at CSB Bank, commented, “The RBI’s cautious approach to liquidity is promising for the economy. It’s wise to maintain the progress achieved in controlling inflation; hence, any excess surplus should be avoided. The projected inflation rate of 4.5 percent for the next year might be conservative, and we could anticipate a change in stance after the second quarter of next year. The RBI will prioritize easing liquidity initially and then consider rate cuts if necessary.”
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