RBI Announces Steps To Maintain ‘Orderly’ And ‘Congenial’ Conditions
A cyclist rides along an empty street past the Reserve Bank of India (RBI) headquarters during a lockdown imposed due to the coronavirus in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

RBI Announces Steps To Maintain ‘Orderly’ And ‘Congenial’ Conditions

The Reserve Bank of India on Monday announced a series of steps aimed at maintaining “orderly” market conditions and “congenial” financial conditions.

The steps came against the backdrop of a sharp rise in bond yields after the Monetary Policy Committee left interest rates unchanged at its last meeting, while raising concerns about the elevated levels of inflation.

To counter the rise in market interest rates, the RBI said it will undertake the following steps:

  • Conduct special open market operation with simultaneous purchase and sale of government securities for an aggregate amount of Rs 20,000 crore in two tranches. The auctions will take place on September 10 and September 17.
  • The RBI also said it remains committed to conducting more such auctions as warranted by market conditions.
  • The central bank will hold term repo operations for an aggregate amount of Rs 100,000 crore at floating rates in mid-September. This is being done to counter any liquidity pressures that may emerge due to advance tax payments.
  • In addition, banks that had availed funds under the long term repo operations are being allowed to refinance their borrowings via these term repo auctions at lower costs. This is being done to ensure that banks don’t get stuck with higher cost funds as policy rates fall.
  • The RBI has allowed banks to hold fresh government securities acquired from Sept. 1, 2020 in the held-to-maturity bucket up to an overall limit of 22% of deposits till March 31, 2021. This will increase demand for government bonds without banks fearing mark-to-market losses due to fluctuation in bond yields.

The measures are being taken to “continue to ensure orderly market conditions and congenial financial conditions,” the RBI said in its release.

Calming Inflation Fears

The central bank also tried to calm inflation fears that have taken hold in the market, saying that there are indications that some price pressures are cooling off. The RBI has not provided updated inflation forecasts since the outbreak of the Covid-19 pandemic.

Since March, inflation has risen from 5.9% to just under 7%.

The RBI said indications are that inflation pressures are easing. In a rare reference to the rupee-dollar exchange rate, the central bank said the recent appreciation in the rupee had also helped reduce imported inflation.

There are indications that food and fuel prices are stabilising 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.
RBI Statement

The central bank reiterated that it remains committed to supporting growth in the economy.

“The RBI remains committed to use 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,” it said.

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