Shaktikanta Das, the governor of the Reserve Bank of India (RBI), surprised the market in the previous two policies, which were announced in August and October, first with words and then with action.
The markets were caught off guard in August when the incremental cash reserve ratio (I-CRR) was introduced to remove excess liquidity.
Nothing happened in October. Instead, Das’ remark—dubbed a “open mouth operation”—that the central bank would sell bonds in order to carry out open market operations (OMOs) subdued the bond market frenzy that followed JP Morgan’s inclusion of India in its Emerging Market Bond Index.
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RBI Governor’s October Policy:
In its October policy, the RBI astonished the markets by hinting that OMO (by auction) would be used as a weapon for absorbing liquidity. The rate of screen-based OMO sales has decreased since then, and the RBI has not held any OMO sales by auction since then. In fact, there haven’t been any OMO screen-based sales since November 2, according to IDFC First Bank economist Gaura Sen Gupta.
“The chances of incremental tightening of liquidity appear relatively low because the cost of liquidity and short-end rates are fairly high, and I don’t think the RBI’s intention is to slow the economy,” stated Rahul Bajoria, managing director and head of emerging markets, Asia (ex-China), economics, Barclays. However, it might seek to moderate economic expansion to avoid any danger of overheating. The goal of risk weight management is to regulate the quality of credit disbursement, not always to significantly slow down credit growth. “Steps to reduce economic momentum are difficult to envisage in the midst of falling core inflation,” Bajoria continued.
The past two policy reviews by the RBI were characterized by a hawkish tone, and those actions served to emphasize that the central bank was not going to let its guard down anytime soon.
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