Reserve Bank of India Governor Shaktikanta Das on Friday dropped ample hints on unwinding of the exceptional liquidity measures announced over the last one-and-a-half years, stating that the process has to be gradual, calibrated and non-disruptive, while remaining supportive of the economic recovery.

Given the liquidity overhang of more than ₹13-lakh crore, Das underscored that the RBI will continue to absorb surplus liquidity via the 14-day variable rate reverse repo (VRRR) auction.

Further, the Central bank will discontinue the Government Security Acquisition Programme (G-SAP) operation, which is aimed at providing liquidity to banks so that they subscribe to Government Securities at primary auctions and yields are kept under check. The Governor said, “As we approach the shore, we don’t want to rock the boat. We want to go beyond the shore.”

Das said as the economy shows signs of emerging from the Covid-19 inflicted ravages, a near consensus view emerging among market participants and policy makers is that the liquidity conditions emanating from the exceptional measures instituted during the crisis would need to evolve in sync with the macroeconomic developments to preserve financial stability

Keeping in view the market feedback, it is proposed to undertake the 14-day VRRR auctions on a fortnightly basis in the following manner: ₹4-lakh crore today as already notified; ₹4.5-lakh crore on October 22; ₹5-lakh crore on November 3; ₹5.5-lakh crore on November 18; and ₹6-lakh crore on December 3.

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.

“Let me reiterate and re-emphasise that the VRRR auctions are primarily a tool for rebalancing liquidity as part of our liquidity management operations and should not be interpreted as a reversal of the accommodative policy stance. The RBI will ensure that there is adequate liquidity to support the process of economic recovery. The Reserve Bank will continue to support the market in ensuring an orderly completion of the borrowing programme of the government,” Das said. Further, RBI’s focus on orderly evolution of the yield curve as a public good also continues.

G-SAP

Das emphasised that given the existing liquidity overhang, the absence of a need for additional borrowing for GST compensation and the expected expansion of liquidity in the system as government spending increases in line with budget estimates, the need for undertaking further G-SAP operations at this juncture does not arise.

The Reserve Bank, however, would remain in readiness to undertake G-SAP as and when warranted by liquidity conditions and also continue to flexibly conduct other liquidity management operations including Operation Twist (OT) and regular open market operations (OMOs), he added.

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