The Reserve Bank of India is expected to conduct more variable rate repo auctions ahead of the April monetary policy review to address tight liquidity in the banking system and reduce year-end pressure, money market experts and treasury heads said.
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They also expect the central bank to address liquidity concerns in the monetary policy.
“It’s possible that the RBI may address liquidity concerns in its April monetary policy review, considering the Lok Sabha elections. The RBI may continue with such measures (VRR auctions) to address liquidity concerns,” said Venkatakrishnan Srinivasan, founder of Rockfort Fincap.
Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank, said the RBI will likely reiterate its commitment to peg overnight rates to the repo rate of 6.50 percent.
“They will continue to use VRR and variable rate reverse repo (VRRR) as required,” Pawar said.
The six-member Monetary Policy Committee will meet from April 3 to 5 to decide on interest rates.
Liquidity conditions
Liquidity in the banking system turned tight over the past few days, especially after outflows of goods and services tax (GST) payments. This resulted in overnight call money rates rising.
To address this issue, the central bank conducted various VRR auctions that helped to ease overnight rates and narrow the liquidity deficit. Liquidity in the banking system was in a deficit of Rs 45,266.86 crore, as per the RBI’s money market operation data as of March 26. It narrowed from Rs 1.39 lakh crore on March 21.
According to a Kotak Mahindra Bank report dated March 26, liquidity conditions should improve significantly by the end of the year amid government spending, with the net liquidity adjustment facility (LAF) shifting towards surplus territory.
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Mataprasad Pandey, vice president at Arete Capital Service, said liquidity is generally tight in March and hence the RBI continues to support liquidity with VRR auctions. In April, liquidity is expected to ease, and it is less likely to see such VRR auctions again, Pandey said.
“Net durable liquidity in surplus, frictional liquidity is only oscillating in tune with monthly tax outflows. Month-end government spending and RBI foreign exchange interventions may ease liquidity conditions further in the new financial year,” said V Ramachandra Reddy, head of treasury at Karur Vysya Bank.
Policy expectations
The MPC is likely to maintain the status quo in April while remaining cautious on inflation, according to Moneycontrol’s poll of 21 economists, bankers and fund managers.
This is because of the moderation in Consumer Price Index inflation in February and stable economic activity, said a majority of the economists who participated in the poll. Also, experts pointed out that higher growth in gross domestic product gives the central bank room to focus more on lowering inflation.
The majority of experts said the central bank will maintain its ‘withdrawal of accommodation’ stance. However, one economist said it will be changed to neutral.
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Economists and bankers said the central bank is likely to make minor changes in the inflation forecast due to easing fuel and cooking gas prices.
