RBI Policy: Shaktikanta Das announces 4 steps as central bank moves to rebalance liquidity

Variable rate repo (VRR) operations of varying tenors to be conducted when warranted

VRRs, VRRRs of 14-day tenor to operate as main liquidity management tool

These main operations to be supported by fine-tuning operations to tide over any unanticipated liquidity changes

From March 1, fixed-rate reverse repo, Marginal Standing Facility (MSF) operations to be available only between 5:30 pm and 11.59 pm on all days (instead of 9:00 am to 11:59 pm)

The RBI's move was in tandem with its intent to start to restore normal liquidity operations in a phased manner, after assuring bond markets of ample liquidity.

The announcements came as part of the RBI's first bi-monthly review of 2022, in which the central bank decided to maintain the status quo on key interest rates.

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The overall system liquidity, though moderated, remains in a large surplus, Das said. Variable reverse repo rates (VRRRs) have become the main option for managing liquidity, he said.

The RBI's decision to continue with a dovish stance and remain accommodative was along expected lines, said Rajee R, Chief Ratings Officer at Brickwork Ratings. The emphasis that VRR and VRRR will be the main tools for liquidity adjustment is in continuance with the RBI's calibrated liquidity management policy to maintain financial stability, she added.

The RBI Governor said the rebalancing of liquidity has involved two-sided operations:

Overnight fixed-rate reverse repo towards 14-day variable rate reverse repo (VRRR) auction as the main operation

Repo auctions of 1-3 day maturities (to meet transient liquidity mismatches, shortages)

In a customary post-statement interaction with media, Das said liquidity is not in the domain of the MPC but the RBI. "The yield curve and liquidity issues are entirely in the RBI's domain so it is in my statement (and not MPC)," he said.

In its policy statement, the RBI said the "key to effective liquidity management is ‘timing’, and having a nuanced and nimble-footed approach that responds swiftly to the manner in which liquidity tilts". A slew of measures taken by the RBI to tackle the pandemic has brought down borrowing costs to their lowest levels in decades, according to the RBI statement.

Since August 2021, when the rebalancing began, the daily average absorption under the fixed rate reverse repo has moderated sharply, and the effective reverse repo rate increased to 3.87 percent (as of February 4) from 3.37 percent.

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The RBI also extended its term liquidity facility of Rs 50,000 crore to emergency health services. It had rolled out the on-tap liquidity window in May 2021 for ramping up COVID-19 related healthcare infrastructure and services in the country. It said the extension, to June 30, 2022, is in view of the response to the scheme.

"The RBI remains concerned about the on-ground impact due to COVID-19 and is doing its bit to get banks to lend into areas which need support in this regard," said Shivaji Thapliyal, Lead Analyst, Banking and Non-lending Financials-Institutional Equities at YES Securities.

The RBI also extended the on-tap liquidity window of Rs 15,000 crore for contact-intensive sectors. The central bank had in June 2021 opened the liquidity window for certain contact-intensive sectors. The window is now extended till June 30, 2022.