RBI prefers to increase bank lending to reduce excess liquidity

A recovery in bank lending is the RBI’s preferred mode of reducing excess liquidity, and the signal for a possible rise in interest rates will be the shift in focus of the rate-setting panel, the deputy said. -RBI Governor Michael Patra. Thursday.

Patra also defended the RBI’s decision to create an asymmetric liquidity corridor by reducing the reverse repo rate as a measure taken due to the impact of the Covid pandemic which will normalize over time.

The RBI is absorbing over Rs 9million lakh per day through the reverse repurchase corridor as bank credit growth hovers around the 6% mark. On the liquidity management side, concerns are expressed as to whether the introduction of instruments such as Variable Reverse Rate Transactions (VRRR) aims to tighten.

It can be noted that the RBI is on a prolonged rate hiatus due to high inflation and given continued upward price forces some analysts are already expecting a rate hike next year.

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Patra made it clear that some sections had “misinterpreted” the VRRR as a liquidity squeeze and asserted that the central bank would remain in surplus mode.

“We hope that the demand for credit will pick up and that the banks will resume their main function of financial intermediation as soon as possible. This is the natural and preferred way of the RBI in which the surpluses of the LAF (adjustment facility liquidity) may be reduced, ”Patra said in a speech at an event hosted by lobby group CII.

The VRRR is neither a signal of liquidity withdrawal nor of interest rates taking off.

“The latter’s signals will be transmitted through the position which is articulated by the MPC (Monetary Policy Committee) in its future resolutions,” he said.

“We don’t like temper tantrums; we like lukewarm, seamless transitions – glide paths rather than forced landings,” the GM added.

Stating that the RBI’s MPC is committed to its core price stability mandate, Patra said inflationary pressures are largely due to supply shocks that occur repeatedly, giving it a lingering character. Headline inflation could reach 5.7% or lower in FY22, he said.

A small group of goods – items making up about 20 percent of the CPI (consumer price inflation) basket are responsible for more than 50 percent of inflation – puts pressure on inflation, said Patra, adding that the easing of headline inflation from current levels is “likely to be reluctant and uneven.”

In the last and a half years of the pandemic, Patra admitted that inflation exceeded the upper tolerance range of 6% for two months in FY21, but with the GDP contraction the RBI had to be flexible in driving. of the key rate.

Raising the key rate when inflation exceeded 6% would have been “disastrous,” Patra said, adding that the RBI’s policies were justified when growth returned to positive territory in the last quarter of the year. exercise 21.

“Looking back, it was the combination of frame flexibility and astute judgment that healed the economy and helped it bounce back,” he said.

However, the second wave of the pandemic in the first quarter of fiscal 22 again resulted in setbacks, and Patra said the economy was “scarred” but resilient from the experience of the first wave.

“The recovery appears to be widespread and the linchpin is manufacturing, but production is still below pre-pandemic levels, especially in contact-based services,” he said, reiterating Governor Shaktikanta’s statement. Das on the estimated 9.5% GDP growth for fiscal 22. Be on track.

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