RBI takes another step towards policy normalisation by restoring liquidity framework

RBI Governor Shaktikanta Das presented the monetary policy statement. (Image credit: ANI/Twitter)

The Reserve Bank of India (RBI) has seemingly taken another step on the policy normalisation path by announcing the restoration of its revised liquidity management framework.

"With the progressive return of normalcy, including transient demand for liquidity from the RBI, it is logical to restore the revised liquidity management framework in order to make it more flexible and agile," Governor Shaktikanta Das said on February 10 at the conclusion of the Monetary Policy Committee's meeting.

Also read:  RBI Monetary Policy: Key takeaways from the announcements

The RBI has decided that:

i) Variable rate repo operations of varying tenors will now be conducted as and when needed within the cash reserve ratio (CRR) maintenance cycle.

ii) Variable rate repo and reverse repo operations of 14-day tenor will operate as the main liquidity management tool based on liquidity conditions and will be conducted to coincide with the CRR maintenance cycle.

iii) These main 14-day operations will be supported by fine-tuning operations to tide over any unanticipated liquidity changes during the reserve maintenance period. Operations of longer maturity will also be conducted, if and when needed.

iv) The fixed rate reverse repo facility and the marginal standing facility will only be available from 5.30 pm to 11.59 pm daily starting March 1 as against the current timing of 9 am to 11.59 pm.Catch all lives updates of RBI Monetary Policy here

"Market participants are advised to shift balances out of the fixed rate reverse repo into variable rate reverse repo auctions and avail the automated sweep-in and sweep-out (ASISO) facility in the e-Kuber portal for operational convenience," Das said.

Also read: Explained | Shaktikanta Das presents a non-event policy for markets, plays waiting game

The automated sweep-in and sweep-out, or ASISO, facility was announced in August 2020. It provides greater flexibility to banks in managing their day-end cash balances to meet reserve requirements.

Under this facility, banks can pre-set a specific or range amount of money they wish to maintain with themselves at the end of the day. Any shortfall or excess amount will automatically trigger bids or offers at the marginal standing facility or the reverse repo window.

According to Rahul Bajoria, Chief India Economist at Barclays, the RBI's liquidity actions are "signalling its desire to reduce its hand-holding of markets for managing liquidity, and leave institutions to more actively manage their own liquidity requirements".