Monetary policy committee: RBI holds key rates to boost recovery

 Repo rate unchanged at 4% and reverse repo at 3.35%

The Reserve Bank of India (RBI) on Wednesday kept its key policy repo rate and “accommodative” stance unchanged and said it would lean more on the variable rate than its traditional fixed-rate liquidity absorption facility to drain out excess liquidity from the banking system.

Many economists saw it as a stealth reverse rate hike, even as the central bank kept its reverse repo rate untouched at 3.35 percent.

However, by activating most of the money absorption through the 14-day variable reverse repo rate (VRRR) window, complemented by the 28-day reverse repo, the traditional fixed-rate reverse repo tool is practically redundant now, economists said.

The RBI used the VRRR tool to remove Rs 6 trillion from the banking system by December 3. Now, this will be enhanced to absorb Rs 6.5 trillion on December 17; and further to Rs 7.5 trillion on December 31.

“Consequently, from January 2022 onwards, liquidity absorption will be undertaken mainly through the auction route,” RBI Governor Shaktikanta Das said in his streamed policy statement.

This may push up short-term rates in the system from January, economists said.

Following the last policy of this calendar year, the repo rate remained at 4 percent, the reverse repo rate at 3.35 percent, and the stance “accommodative”. But the RBI tweaked the marginal standing facility (MSF), which banks use for liquidity support during emergencies, to allow borrowing up to 2 percent of the deposit base from 3 percent allowed during the pandemic days. The monetary policy committee (MPC) members voted to maintain the repo rate, but external member Jayanth Varma continued to vote against the stance.