RBI's October Monetary Policy: Liquidity Management Stance To Be Key

The country's apex bank has begun the bi-monthly monetary policy meet today and the outcome shall be presented on October 8, 2021 (Friday). The monetary policy is the central bank's policy stance in respect of using the available monetary instruments for achieving the goals specified in the Act. The primary objective of the monetary policy as per the RBI site is to maintain price stability while keeping in mind the objective of growth.

RBI's October Monetary Policy: Liquidity Management Stance To Be Key

Here are some of the key points to note as provided in the Emkay Global Financial Services' RBI MPC Preview report:

• Liquidity management: RBI's s take on liquidity management shall be the key focus point. "While the RBI may not shock the system with a reverse repo hike, the policy will be used as a lever to prepare markets for a gradualist approach toward normalization through both communication and action. Markets will still be assuaged that no premature tightening of financial conditions will happen and the uptick in yields will be managed", said the report.
• Liquidity management tools such as 1) sterilization of its recent GSAP instalments with a simultaneous sale of bonds (OTs), 2) possible higher intervention via the FX forwards route, and 3) partly rolling over its maturing FX forwards book will continue to be used
• No direct tightening tools will be employed: RBI is expected not to deploy any direct tightening tools like MSS, CRR hikes, FX swaps or outright OMO sales in the coming quarters. "Instead, we expect the RBI to let natural stabilizers like increased credit offtake and high CIC etc. to reduce the liquidity surplus", views the brokerage house.
• Inflation forecast can be lowered by 30-40 bps but at the same time RBI will caution on upside risks via imported inflation and its pass-through.

The policymakers would tread cautiously and ensure an orderly evolution of the yield curve, having seen extreme market reactions in the past. While GSAPs will get shallow and sterilized ahead, the other tools mentioned above will remain preferred tools for liquidity management and will serve as a precursor to a reverse repo hike at the ensuing MPC meets. Liquidity tightening, however, may not be targeted in the coming months. We do not see the RBI deploying any direct tightening tools like MSS, CRR hikes, FX swaps or outright OMO sales. Instead, we expect the RBI to let natural stabilizers like increased credit offtake and higher CIC etc. reduce the liquidity surplus, adds the brokerage report.

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