Reduction In Surplus Liquidity Is Imperative And Must Be Done, Say Rbi External Members

Minutes from the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) indicate a majority of members are somewhat more convinced that growth is picking up quickly, though it may still need accommodating policy support and therefore no increase in rates. In addition, more members appear to be open to reverse pension hikes and reduced cash flow.

In an interview with CNBC-TV18’s Latha Venkatesh, MPC external member Ashima Goyal said RBI needs more tools to manage cash flow more effectively.

“India continues to attract large inflows and so even in the latest policy we had talked about how it’s the RBI’s call on what they do with cash. They may move towards reducing liquidity while the position remains accommodative because the position only determines what happens to the repo. They therefore need more tools to manage this increase in liquidity. One of the reasons the reverse repurchase agreement was removed was to encourage banks to lend more because they earn less by guaranteeing dormant funds, but banks haven’t really increased their lending. So, as the reverse repo increases, it could be linked to an increase in deposit rates so that they continue to have that incentive to earn more by making loans that earn them higher returns.

Shashanka Bhide, an external member of the MPC, said reducing excess liquidity is imperative and must be done.

“The low repo rates were (intended) to encourage more credit and this problem persists. The issue of the reverse repo rate is also linked to what is happening in the rest of the system. So, given that there is excess liquidity, managing that liquidity is one of the concerns and the reverse repo rate is one of the instruments to do so. So this is conditional on what we expect to happen. So reducing excess cash is definitely something that needs to be done. “

Another external member of the MPC, Jayanth Varma, said the RBI must be neutral on the repo rate because the risks are balanced for inflation and growth.

“We are talking about moving towards standardization. We need to get back to a position where we are sort of neutral even on the repo rate as more and more risks balance out, both to inflation and to growth. There are significant risks to growth and there are also significant risks to inflation. We need to move towards a neutral position, even on the repo. “

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