NEW DELHI: As the second wave ebbs, the Reserve Bank of India (RBI) now plans to conduct fine-tuning operations to manage unanticipated one-off liquidity flows.
Speaking at the 21st annual conference organised by Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Primary Dealers’ Association of India (PDAI), RBI Governor Shaktikanta Das said that the central bank lowered interest rates, expanded its balance sheets through large-scale purchase of government securities (G-sec) and other assets and injecting vast amounts of liquidity into the financial system in response to the devastating Covid-19 pandemic.
Now is the time to ensure liquid conditions in the system evolve in an evenly distributed manner. “As markets settle down to regular timings and functioning and liquidity operations normalise, the Reserve Bank will also conduct fine-tuning operations from time to time as needed to manage unanticipated and one-off liquidity flows so that liquid conditions in the system evolve in a balanced and evenly distributed manner,” said Das. Variable Rate Reverse Repo (VRRR) auction will remain the main instrument to absorb excess liquidity from the banking system.
He also said that the RBI is working together with the central government to enable international settlement of transactions in government securities (G-sec) through international central securities depositories (ICSDs).
“The yield curve accordingly displays kinks, reflecting the liquidity premium commanded by select securities / tenors. To a certain extent, this is the result of the market microstructure in India, dominated as it is by ‘buy and hold’ and ‘long only’ investors. We need to develop a yield curve that is liquid across tenors,” Das noted.