RBI Announces Correctionary Measures To Control Rise In Market Interest Rates, Inflation Sources Identified And Addressed

Reserve Bank of India

On Monday the Reserve Bank of India announced a series of measures aimed at maintaining orderly market conditions and congenial financial conditions. These measures will allay the fear of the markets over rising yields and higher borrowing Programmes. The measures came against the response to a rising bond’s yield after the Monetary Policy Committee left interest rates unchanged at its last meeting while raising concerns over the increasing inflation.

The RBI has announced the following measures to control the rise in market interest rates

The central bank increased the held to maturity limit (HTM) or the amount that banks invest in government securities from 19.5% to 22%. It also announced conducting special open market operation worth Rs 20000 crore and term repo operations worth Rs 20000 crore and term repo operations worth Rs 1 trillion to infuse liquidity into the market. The auctions would be conducted on September 10, 2020, and September 17, 2020. The RBI remains committed to conducting further such operations as warranted by market conditions.

The Reserve Bank will conduct term repo operations for an aggregate amount of ₹100,000 crores at floating rates (i.e., at the prevailing repo rate) in the middle of September to assuage pressures on the market on account of advance tax outflows. In order to reduce the cost of funds, banks that had availed of funds under long-term repo operations (LTROs) may exercise the option of reversing these transactions before maturity. Thus, the banks may reduce their interest liability by returning funds taken at the repo rate prevailing at that time (5.15 percent) and availing funds at the current repo rate of 4 percent. Details are being notified separately.

Currently, banks are required to maintain 18 percent of their net demand and time liabilities (NDTL) in SLR securities. The extant limit for investments that can be held in the HTM category is 25 percent of total investment. Banks are allowed to exceed this limit provided the excess is invested in SLR securities within an overall limit of 19.5 percent of NDTL. SLR securities held in the HTM category by major banks amount to around 17.3 percent of NDTL at present. However, there are inter-bank variations with some banks close to the 19.5 percent of the NDTL limit. Accordingly, it has been decided to allow banks to hold fresh acquisitions of SLR securities acquired from September 1, 2020, under HTM up to an overall limit of 22 percent of NDTL up to March 31, 2021, which shall be reviewed thereafter. Details are being notified separately.

The RBI stands ready to conduct market operations as required through a variety of instruments so as to ensure orderly market functioning.

The RBI in its press release said, recently, market sentiment has been impacted by concerns relating to the inflation outlook and the fiscal situation amidst global developments that have firmed up yields abroad.

The RBI also assured that the central bank remains committed to using all instruments at its command to revive the economy by maintaining congenial financial conditions, mitigate the impact of COVID-19 and restore the economy to a path of sustainable growth while preserving macroeconomic and financial stability.

RBI in a statement said, “On the outlook for inflation, the resolution of the Monetary Policy Committee (MPC) on August 6, 2020, identified the sources of inflation pressures and expected that although headline inflation may remain elevated in Q2:2020-21, it would moderate in H2:2020-21. Accordingly, the MPC decided to pause and remain watchful and use the available space judiciously to support the revival of the economy. There are indications that food and fuel prices are stabilizing and cost-push factors are moderating. In addition, the recent appreciation of the rupee is working towards containing imported inflationary pressures. The RBI remains vigilant about these developments. In support of the accommodative stance of monetary policy, the RBI is committed to ensuring comfortable liquidity and financing conditions in the economy.

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