MPC 2.0 Refrains from Rate Cut, but RBI Continues to Take Right Steps on Liquidity Front

Perhaps the most important measure announced was the RBI's decision to buy state government bonds.

Rate cut or no rate cut, whatever the Reserve Bank of India does makes news. This time around, the central bank’s monetary policy committee has decided to keep the current interest rates unchanged. This was to be expected, for the inflation level, measured through the consumer price index, is ruling above the prescribed upper level. And price rise, always a touchy issue, is now a political cause for concern in the aftermath of the pandemic as it hurts the country’s poorest the most.

Indeed, the RBI has done well to keep the key policy rates unchanged. If a rate cut was a cure for demand revival, the previous cuts haven’t clearly seen any big jump in the overall demand.

Instead, where the central bank has consistently focused is on easing the liquidity in the system. Since the outbreak of coronavirus in March, the banking regulator has, in fact, been proactively addressing the liquidity issue. Of course, as C. Rangarajan, former governor of the RBI, said, the constraint for growth “goes beyond” credit availability. The hint here is that the responsibility goes beyond the monetary authority and devolves equally on the fiscal mandarins.

Having said this, the RBI has done well within its domain to facilitate an environment that could quickly help the sliding economy to make a reversal if the other half of the policy apparatus (read the government) could get its act together without loss of time.

There are indeed some significant moves by the RBI, now driven by a new-look MPC (Monetary Policy Committee).

The RBI has signalled that is now ready for infusing more targeted liquidity.

It said it would conduct on-tap targeted long-term repo operations (TLTRO) with tenors of up to three years for a total amount of up to Rs 1,00,000 crore at a floating rate linked to the policy repo rate. The scheme will be available up to March 31, 2021 with flexibility with regard to enhancement of the amount and period after a review of the response to the scheme.

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The on-tap targeted long-term repo operations could ensure that the benefits do not remain with just the government. On-tap TLTROs will enable banks to borrow from the RBI any time and use the proceeds to buy corporate bonds or even lend to fund-starved sectors.

A more significant move is its decision to conduct open market operations in SDLs (state development loans). Now, the RBI, for the first time perhaps, is willing to invest in these state bonds.

“At present, SDLs are eligible collateral for Liquidity Adjustment Facility (LAF) along with T-bills, dated government securities and oil bonds. To improve liquidity and facilitate efficient pricing, it has been decided to conduct open market operations (OMOs) in SDLs as a special case during the current financial year. The OMOs would be conducted for a basket of SDLs comprising securities issued by states,” the RBI said.

Starting next week, the size of the open market operations (OMO) to buy government bonds will be increased to Rs 20,000 crore. So far, auction sizes have been around Rs 10,000 crore.

This move, some say, is a more effective way of bringing the yield down on benchmark government securities.

All these initiatives are seen in a holistic sense. The debt management assumes a critical dimension with the focus on keeping the yield on long-term papers reasonable so as to provide a friendly cost environment for borrowers of all kinds.

K.T. Jagannathan is a senior business journalist.