Is the #RBI's #VRRR move policy normalisation? Fridays' note argued that the upward calibration of the variable rate reverse repo (VRRR) was not a sign of normalisation of policy, especially when the Governor said it himself explicitly. The note argued that the VRRR...(1/12) 
...calibration was just shifting of monies from one pocket to another, especially when the #callmoney rate is still 22bps below the reverse repo rate. The focus therefore is to bring the call rate closer to the policy rate, when system liquidity is on the rise. One can...(2/12)
...justify the market narrative on three counts. Firstly, the markets saw a surprise dissent against the policy decision (5:1) and noted that it was not unanimous. Secondly, the 60bps upward revision to inflation created a flutter especially when the RBI maintained a...(3/12)
...'transitory' language around inflation. Thirdly given that the VRRR window is a 14-day window unlike the fixed rate reverse repo which is overnight in nature. So, this gives a sense to the markets that the RBI is cordoning off more money/liquidity away from the system...(4/12)
...(or overnight window). While all of these arguments have their valid points of view, the perspective to the VRRR calibration is more likely brought out when one notices that the weighted average call ra-te is currently at 3.13%, a good 22bps below the RBI's reverse...(5/12)
...repo rate. With a muted demand for credit on the ground currently, more money is being deposited by financial institutions with the RBI under the reverse repo window that gives them an interest of 3.35%. The 14-day VRRR window currently only absorbs Rs.2tr of...(6/12)
...liquidity. By increasing this liquidity absorption by the RBI to Rs.4tr by September, the RBI is incentivising the system to shift to the VRRR window where the auction cut-off is around 9-10bps higher than the 3.35% of the reverse repo rate. This move of the RBI...(7/12)
...is after it noticed high bid-cover ratios in VRRR auctions. This means that they noticed significant demand for the VRRR deposits that could not be met due to the Rs.2tr cap. A gradual increase of the current Rs.2tr to Rs.4tr (Rs.2.5tr>Rs.3tr>Rs.3.5tr>Rs.4tr) ensures...(8/12)
...that the RBI would also be giving markets the room to realign rates gradually, closer to the reverse repo rate. In short, the RBI's move is a clear reflection of its discomfort with an increasing amount of money floating around and a move to push rates closer to the...(9/12)
...effective policy rates (here reverse repo). We are still to read the magnitude of India's expected third wave, the confirmation of investment as a driver for growth and importantly the Fed's mind on its ongoing infections curve that would help prolong the RBI's...(10/12)
...accommodative cushion for the economy. Further, the RBI continues to see “…demand-pull pressures remain inert" and "weak and overcast by the pandemic”, with nurturing growth impulses being the "overarching priority". There is one more outside thought to be kept in...(11/12)
...mind. #MrDas' three-year tenure ends Dec'21. While there is no public information on whether the Governor will get a 2Y extension, from the standpoint of policy continuity, the last thing a central bank would want to do is initiate an indication of a policy shift....(12/12)
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