With inflation being an imminent threat, the Reserve Bank of India recently announced the resumption of financial operations under a revised liquidity management framework. Under the new and revised framework, RBI will be rolling back the Covid-19 economic measures that were announced in March last year. The enforcement of the revised framework will be pursued in a phased manner and the first phase of the strategy have been in effect from January 15 with a Rs 2 Lakh crore variable rate reverse repo auction to be held.
While the liquidity management framework had been suspended during the peak phases of the Covid-19 pandemic to safeguard the financial condition of the country’s populace, the bank had taken a call on the restoration of the liquidity management framework in a phased manner later. A different outlook on the objectives and necessary RBI measures to oversee the liquidity management of funds in a post-pandemic time led to a revision in the strategy of liquidity management. Now, the RBI is ready to put the strategy to work.
RBI has decided to keep the window for fixed rate reverse repo open throughout the day. The bank has also decided to keep the marginal standing facility operations open daylong. The decision would give eligible market investors the option to exercise flexibility in their liquidity management. This is taken so that the investors can protect themselves from the instability of a highly volatile market.
In a pandemic-struck market, where health risks were running high, the RBI had decided to shorten the trading hours in the stock market. This decision was put in effect from April 7 last year. This was done to limit the exposure people had to risky conditions that were prevailing outside then. With the post-pandemic phase here now, the RBI has restored the normal trading hours following the phases of Unlock that normalised public and economic activity and reopened institutions. The restoration of the normal trading hours has been done from November 9, 2020 in a gradual manner.
With the normalisation of the national economic activity after numerous phases of Unlock, the RBI has been intending to withdraw Covid-specific policies. During the RBI’s December monetary policy committee meeting, the bank’s executive director said the liquidity, monetary, and credit assets have to be closely monitored so that the market stabilises at a greater level and strides over a phase of recovery into a phase of economic growth in coming months. This is important to protect the economy against any instability that can be a triggered by the decline in short-term borrowing costs below the operational policy rates in the future. A recent RBI report predicted the inflation rates to be kept at 4% throughout the medium term.
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