RBI To Rebalance Liquidity On A Dynamic Basis

The Reserve Bank of India is likely to balance liquidity on a dynamic basis. According to the RBI, the pandemic has delivered a once in a century crisis, with a health shock morphing into a macroeconomic and financial shock. The RBI undertook a slew of measures to deal with such an exceptional situation.

"As a consequence, borrowing costs fell to their lowest levels in decades and spreads narrowed across rating cohorts. Record levels of government securities, corporate bonds and debentures were issued. Corporate entities have been able to deleverage seamlessly and reduce high-cost debt while improving profitability and retained earnings for future capex. Overall, the financial sector has remained fully functional and has anchored the process of recovery. In our assessment, the policy actions of the RBI have yielded the desired results in a smooth and orderly manner," the RBI has said.

"With these objectives being achieved on an ongoing basis, the Reserve Bank has turned to rebalancing liquidity on a dynamic basis, while maintaining adequate liquidity in support of its accommodative stance. This rebalancing has involved two-sided operations: first, rebalancing liquidity from the overnight fixed rate reverse repo towards the 14-day variable rate reverse repo (VRRR) auction as the main operation, supported by fine-tuning auctions of varying tenors as envisaged in the Revised Liquidity Framework of Feb 20221. and second, conducting repo auctions of 1-3 day maturities to meet transient liquidity mismatches and shortages, as for instance in the recent case of more than expected GST outflows during the third week of January 2022. The key to effective liquidity management is the 'timing' and having a nuanced and nimble footed approach that responds swiftly to the manner in which liquidity tilts," the country's central bank has said.

As a result of RBI's rebalancing operations, the daily average absorption under the fixed rate reverse repo has moderated sharply since August 2021 when rebalancing started. Overall system liquidity, however, remains in large surplus, though it has moderated over the same period. Reflecting the migration of surplus liquidity from the overnight window to longer tenors, the effective reverse repo rate - the weighted average rate of the fixed rate reverse repo and the VRRRs of longer maturity - increased from 3.37 per cent as at end-August 2021 to 3.87 percent as on February 4, 2022.