Inflation focused RBI now moves to absorb excess liquidity

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SME Times News Bureau | 08 Apr, 2021
With an eye on inflation and surplus liquidity in the system, the RBI on Wednesday decided to conduct variable rate reverse repo (VRRR) auctions of longer maturity.

The apex bank had recommenced VRRR auctions since January 15, 2021 but the tenor had been shorter at 14 days.

The fresh long duration VRRR is being launched as indicated in the Revised Liquidity Management Framework announced on February 6, 2020.

The amount and tenor of these auctions will be decided based on the evolving liquidity and financial conditions, RBI Governor Shaktikanta Das said while presenting the MPC decisions.

It would be worthwhile to note that despite the recommencement of 14-day variable rate reverse repo (VRRR) auctions since early 2021, liquidity absorbed through the fixed rate reverse repo has steadily increased from a fortnightly average of Rs 4.3 lakh crore during January 16-29 to Rs 4.9 lakh crore during January 30-March 31, 2021.

Also, the surplus liquidity has been reflected with reserve money rising by 14.2 per cent(YoY) as on March 26, 2021 driven by currency demand, while money supply (M3) growing by 11.8 per cent (YoY) (as on March 26), with bank credit growth at 5.6 per cent(YoY) (as on March 26).

"In view of the success of VRRR and given the rising level of surplus liquidity, it has now been decided to conduct VRRR auctions of longer maturity...This is a part of RBI's liquidity management operations and should not be read as liquidity tightening," Das said.

"In fact, by paying a higher rate of interest on liquidity absorptions through the VRRR auctions, the RBI is indirectly expanding liquidity," he added.