Shaktikanta Das, governor of the Reserve Bank of India (RBI), said on Tuesday that the central bank will perform fine-tuning operations to control unanticipated liquidity flows. Das stated that the variable rate reverse repo (VRRR) auction will continue to be the primary tool for absorbing excess liquidity from the banking system.
“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 at a conference organised by Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Primary Dealers’ Association of India (PDAI).
Das also stated that the RBI and the government are working to facilitate international settlement of G-Sec transactions via international central securities depositories (ICSDs). This will improve non-residents' access to G-Sec markets as well as India's inclusion in global bond indices, which is currently being worked on, he said.
The market should aim to introduce new instruments to facilitate hedging of long-term interest rate and reinvestment risk by market participants such as insurance companies, provident and pension funds and corporates, Das said.
The secondary market liquidity, as measured by the turnover ratio, is often relatively low and tends to remain concentrated in a few securities and tenors, he said.
“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," said Das.
The RBI had held policy rates steady and maintained an accommodating policy stance in its previous monetary policy announcement in August. Jayant Varma, one of the six members of the Monetary Policy Committee (MPC), proposed hiking the reverse repo rate to normalise the overly accommodative stance.
The current level of the reverse repo rate is no longer appropriate, Varma had said and called for a “gradual normalisation" of the width of the policy corridor or the difference between the repo and the reverse repo rate.