RBI’s communication key to handling excess liquidity, says StanChart’s Sahay


NEW DELHI: Over the last few weeks, a conundrum has resurfaced for the Reserve Bank of India — how to keep the liquidity surplus in the banking system from ballooning past a point that would be difficult to tackle in the future.

Standard Chartered Bank’s head of economic research – South Asia, Anubhuti Sahay, is of the view that while it is important to permit a surplus of liquidity, it is equally important that “unnecessary excesses” are mopped off.

“I would suggest the following to the RBI Governor. The stock of liquidity if it becomes too large can become very difficult to absorb later on. Thus it is important that timely action is taken to ensure that liquidity remains in surplus, allows monetary policy transmission but unnecessary excesses are mopped off,” she said.

At present, liquidity in the banking system is estimated to be around 6 lakh crore rupees while the government is expected to be sitting on around 4 lakh crores, taking the core liquidity above 10 lakh crores.

Liquidity in the banking system in seen rising in the Jul-Sep quarter because of redemptions of Treasury Bills worth around 1.7 lakh crores, treasury officials said. In addition, the RBI is regularly infusing durable liquidity through its bond purchases under the recently announced ‘Government Securities Acqusition Programme’.

For the current quarter, the central bank has committed bond purchases worth 1.2 lakh crores.

From the perspective of its bond purchases there is little that the RBI can do because it is necessary for the central bank to be an active buyer of gilts and anchor sovereign borrowing costs at a time when the government borrowing programme is huge.

Moreover, the surplus liquidity conditions maintained by the RBI have had a significant role to play when it comes to keeping credit costs in the economy low at a time when the coronavirus crisis has crippled demand.

Sahay said that the RBI’s communication to markets would play a key factor in how the central bank manages episodes of a large accretion to liquidity.

In January 2021, markets were spooked when the RBI unexpectedly announced variable rate reverse repo operations as the step was taken as a precursor to policy normalisation.

At the time, the liquidity surplus was comparable to what it is now. The RBI has since, several times assured markets that it is not taking any steps to commence policy normalisation.

“It is important that measures are announced on a regular frequency while clarifying that these are not measures towards policy normalisation,” Sahay said.

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