RBI To Organize Long Term Auction To Absorb Liquidity Soon

The RBI, central bank of India has recently announced its first long-term auction to absorb liquidity. With this small normalization step, the country is expecting liquidity absorption policies and a potential reverse repo rate hike at the end of the year. RBI is going to have a 28-day variable reverse repo auction of Rs. 50,000 crores on November, 2, along with a 7-day VRRR.

However, the quantum was decreased to Rs. 1.5 trillion from Rs. 2 trillion earlier, and these are short-term liquidity management instruments. Additionally, previously in the October 8 policy, RBI stated, "Further, depending upon the evolving liquidity conditions - especially the quantum of capital flows, pace of government expenditure and credit offtake - the RBI may also consider complementing the 14-day VRRR auctions with 28-day VRRR auctions in a similar calibrated fashion." at that time the central bank hiked the quantum of 14-day VRRR auction to Rs. 6 crores.

Indicating the VRRR auction, RBI Governor Shaktikanta Das said, "Depending upon the evolving liquidity conditions, especially the quantum of capital flows, pace of government expenditure and credit offtake-the RBI may also consider complementing the 14-day VRRR auctions with 28-day VRRR auctions in a similar calibrated fashion."

Opinion

Economist Kaushik Das, Chief Economist, Deutsche Bank, stated that this step means the RBI is now willing to "transition into dealing with liquidity management on a durable basis, albeit in a staggered and non-disruptive manner." According to the Deutsche Bank's anticipation, RBI can hike the reverse repo rate by 25 basis points, to 3.55% in December.

However, with a different tone than the RBI on the matter, Aditi Nayar, Chief Economist at ICRA commented, "None of the MPC members are showing the urgency to act. We continue to believe that the MPC will look through the supply-side factors that are pushing up inflation, and change the stance only after there is clear evidence of a demand revival stoking prices upwards. This is unlikely until the February 2022 policy review. Moreover, the RBI may refrain from hiking the reverse repo rate, until the MPC changes the stance to neutral." She thinks the MPC will delay acting till the next year.

(Also read: Shaktikanta Das Reappointed As Governor Of The RBI For 3 More Years)

Similarly, Naveen Singh, head of trading, ICICI Securities Primary Dealership thinks, "Till the time the market has the option of 7-day and 14-day VRRR, it is going to be lower tendering in 28-day VRRR. It's not going to be effective unless RBI stops 7-day VRRR. It's just one indication that they want to drain out durable liquidity."