RBI Announces steps to maintain Orderly Market Conditions

Reserve bank of India on Monday (August 31) announced conducting of additional special open market operation involving the simultaneous purchase and sale of Government securities for an aggregate amount of Rs.20,000 crore in two tranches of Rs.10,000 crore each. The auctions would be conducted on September 10, 2020 and September 17, 2020. “The RBI remains committed to conduct further such operations as warranted by market conditions” the press release said. In order to reduce the cost of funds for banks, RBI also allowed them to swap the funds raised under long term repo operations (LTRO) at 5.15% with new the funds made available under the Rupees one trillion repo window at 4%. According to the press statement, market sentiment has been impacted by concerns relating to the inflation outlook and the fiscal situation amidst global developments that have firmed up yields abroad. Therefore, RBI will conduct term repo operations for an aggregate amount of Rs.100000 crore at floating rates (i.e., at the prevailing repo rate) in the middle of September to assuage pressures on the market on account of advance tax outflows. In order to reduce the cost of funds, banks that had availed of funds under long-term repo operations (LTROs) may exercise an option of reversing these transactions before maturity. Thus, the banks may reduce their interest liability by returning funds taken at the repo rate prevailing at that time (5.15 per cent) and availing funds at the current repo rate of 4 per cent. Details are being notified separately.

In the resolution of the Monetary Policy Committee (MPC) on August 6, 2020, the committee identified the sources of inflation pressures and expected that although headline inflation may remain elevated in Q2:2020-21, it would moderate in H2:2020-21. Therefore, the MPC decided “to pause and remain watchful and use the available space judiciously to support the revival of the economy” the press release of RBI said. It also said that there are indications that food and fuel prices are stabilising and cost push factors are moderating. In addition, the recent appreciation of the rupee is working towards containing imported inflationary pressures it said. “RBI stands ready to conduct market operations as required through a variety of instruments so as to ensure orderly market functioning,” it assured. The banking regulator also assured that the bank would remain committed to use all instruments at its command to revive the economy by maintaining congenial financial conditions, mitigate the impact of covid-19and restore the economy to a path of sustainable growth while preserving macroeconomic and financial stability.  The statement further guaranteed that the government borrowing programme of the Centre and States for the year 2020-21 will be completed in a non-disruptive manner.