RBI Announces Measures to Foster Orderly Market Conditions

Ashish M. Shaji

08 Sep, 2020

The Reserve Bank of India informed that it had announced special open market operations, and it will continue to monitor evolving liquidity as well as market conditions. It further stated that it would take measured steps for the orderly functioning of the financial market.

Background leading up to RBI announcement to foster orderly market conditions

The Reserve Bank, in its press release, specified that market sentiments had been impacted recently by concerns pertaining to the inflation outlook and the fiscal situation in global developments that have firmed yields abroad.

It caused widespread discussions among the enlightened public on yields on bonds and what actions can be taken by the Reserve Bank to meet the emerging threats. The Reserve Bank gave information on inflation in its communication dated 6^th August 2020 as part of the minutes of the Monetary Policy Committee.

In a statement, RBI said that the National Statistical Office released data on headline CPI for June 2020 on 13^th July along with imputed back prints of the index for April and May 2020. It resulted in a sharp upward revision of food inflation for April and May month. During quarter 1 2020-21, food inflation moderated from 10.05 % in April to 7.3% in June 2020. 

In the meanwhile, fuel inflation went up as international kerosene, and the prices of LPG firmed up. The inflation excluding food and fuel was at 5.4% in the month of June, showing an increase in prices across most sub-groups.

A significant increase in inflation was registered in the month of June in:

• Transport and communication;
• Personal care and effects;
• Pan-tobacco;
• Education.

RBI further stated that headline CPI inflation that was at 5.8% in March 2020, was placed at 6.1% in the provisional estimates for June 2020.

Monetary Policy Committee

On the outlook for inflation, the resolution of the MPC (Monetary Policy Committee) identified the sources of inflation pressures and expected that even though headline inflation may stay elevated, it will moderate in H2:2020-21. Further, the Reserve Bank assured us that the Monetary Policy Committee^[1] chose to pause and stay vigilant and look to support the revival of the economy.

Is there any scope of recovery?

Considering the stabilizing prices of food and fuel and cost-push factors getting moderated, the Reserve Bank decided to remain vigilant about these developments.  Moreover, as per RBI, the recent appreciation of the rupee is working towards containing the imported pressures of inflation. In support of the accommodative stance of the monetary policy, it was committed to ensuring comfortable liquidity and financing conditions in the economy.

What measures have been announced with a view to ensuring orderly market conditions and congenial financial conditions?

 With a view to ensuring orderly market conditions and congenial financial conditions, the Reserve Bank announced the following measures:

• The Reserve Bank will be conducting additional special open market operations involving the simultaneous purchase and the sale of government securities for an aggregate amount of 20000 crore rupees in two tranches of 10000 crore rupees each. The auctions would be conducted on 10^th September 2020 and 17^th September 2020. The Reserve Bank stated that it is committed to conducting further such operations as warranted by market conditions.
• The Reserve Bank shall conduct term repo operations for an aggregate amount of 1 lakh crore at floating rates in mid-September to assuage pressure on the market on account of advance tax outflows. With a view to lowering the cost of funds, banks that availed of funds under the long term repo operations may exercise the option of reversing these transactions before maturity. Therefore banks may reduce their interest liability by returning funds taken at the repo rate prevailing at that period and availing funds at the current repo rate of 4%. 
• As of now, the banks are required to maintain 18% of their net demand and time liabilities in SLR securities. The extant limit for investment that can be held in the HTM (held to maturity) category is 25% of the total investment. Banks are permitted to exceed this limit provided the excess is invested in SLR securities within an overall limit of 19.5% of net demand and time liabilities. SLR securities held in the HTM category by major banks amount to close to 17.3% of net demand and time liabilities at present. However, there are interbank variations with some banks close to 19.5% of the net demand and time liabilities limit. Accordingly, the Reserve Bank has decided to allow banks to hold fresh acquisitions of SLR securities acquired from 1^st September 2020 to 31^st March 2021, which shall be review thereafter. Details are being notified separately.  
• The Reserve bank said that it is ready to conduct market operations as required by a variety of instruments with a view to ensure orderly market functioning.

The Reserve Bank also stated that it stays committed to using all instruments at its command to revive the economy by maintaining congenial financial conditions and mitigate the impact of the Covid-19 pandemic and restore the economy to the path of sustainable growth at the same time preserving macroeconomic and financial stability.

Conclusion