Consumer confidence improving: RBI RBI introduces SDF in a bid to increase effective policy rate

Sentiments on the economic situation, jobs and income got better, shows survey

MUMBAI: Despite geopolitical challenges and concerns over rising inflation, Indian consumers’ perception of current and future economic conditions continues to improve, according to the latest Consumer Confidence Survey conducted by the Reserve Bank of India (RBI) for the March 2-11 period.

“Consumer confidence for the current period continued on its recovery path, witnessed since mid-2021, though the assessment compared to a year ago remained in negative zone. The current situation index improved further in March 2022 on the back of improved sentiments on general economic situation, employment, and household income,” the survey noted.

The current situation index improved from 64.4 in the previous survey, conducted in January, to 71.7 in March. The survey obtains current perceptions visà-vis a year-ago and one-yearahead expectations on the general economic situation, employment, prices, and own income and spending. It was conducted across 5,984 households in 19 cities. The survey showed improvements across all categories with consumer perception of the overall economic situation improving from -48.9 in the previous survey to -40.5. Perceptions about the employment situation improved from -48 to -35.9. Consumers were more positive about their incomes and spending, with perceptions on income improving from -37.4 to -26, and those on spending rising from 48.4 to 53. “Households’ opinion about spending remained positive and was aided by a rise in essential and discretionary spending,” it noted.

Consumers retained a glum view of prices of commodities at -92.1. The survey showed that the one-year outlook, as measured by the future expectations index (FEI), also continued on a recovery path which was interrupted by a dip in the January 2022.

Households’ median inflation perceptions for the current period was unchanged at 9.7% in the latest survey round, while the expectations for both three months and one year ahead rose by 10 basis points each to 10.7% and 10.8%, respectively, as compared to January 2022 round, showed RBI’s Households’ Inflation Expectations Survey.

“For a majority of population and age groups, uncertainty in inflation expectations increased for both three months and one year horizons, as compared to the previous survey round. Three-month-ahead expectations for overall prices and inflation were generally aligned to those for food and non-food products, while one-year-ahead expectations were more aligned to those for non-food products and services,” it noted.

MUMBAI: The Reserve Bank of India (RBI) on Friday effectively raised the policy rate by 40 basis points through the introduction of a standing deposit facility (SDF), through which it seeks to suck out the excess liquidity in the system, but without offering any collateral to banks.

RBI will now use SDF as the floor rate for Liquidity Adjustment Facility (LAF) corridor, instead of the reverse repo, which was kept unchanged at 3.35%. Under the new facility, banks will be able to park their surplus money with the RBI, but at a higher rate of 3.75%.

So far, RBI used three policy rates under the LAF corridor to manage its monetary policy operations, including repo rate, at which it lends to banks, reverse repo rate or the rate at which it drains excess liquidity from banks, and the marginal standing facility (MSF) rate at which RBI supplies liquidity when conditions are challenging. The introduction of this facility will help RBI normalise the width of the LAF corridor to pre-pandemic levels of 50 basis points, with the repo being the target rate.

“It has now been decided to introduce the SDF as the floor of LAF corridor. This would provide symmetry to the operating framework of monetary policy by introducing a standing absorption facility at the bottom of LAF corridor, similar to the standing injection tool at the upper end of the corridor, namely the MSF. Thus, at both ends of LAF corridor, there will be standing facilities,” Shaktikanta Das, governor , RBI, said. RBI dropped its pledge to keep the policy loose “as long as necessary” for the first time since late 2019. “RBI will engage in a gradual and calibrated withdrawal of excess liquidity over a multi-year time frame in a nondisruptive manner, beginning this year. The aim is to restore the size of the liquidity surplus in the system to a level consistent with the prevailing stance of the monetary policy,” it said.

Since last year, RBI has been absorbing excess liquidity via variable rate reverse repo auctions. It allowed banks to bid higher than the reverse repo rate, and pushing the weighted average call money rate close to 3.95%. In February, RBI said VRRR and variable rate repo of 14-day tenor will operate as the primary liquidity management tool. “With 80% surplus liquidity absorbed under VRRR at a rate closer to te repo rate of 4%, the SDF at 3.75% will improve returns on the balance liquidity placed by banks at a reverse repo rate of 3.35%,” said Anil Gupta, vice president and co-group head, ICRA Ltd.

This could also lead to an increase in overnight call money rates and will be positive for profitability of banks. This will however also lead to a further increase in short-term rates such as T-bill and consequent increase in borrowing costs linked to such rates. We also expect banks to raise deposit rates in short-term buckets as they can park the liquidity so generated at better rates,” said Anil Gupta, vice president & co-group head, ICRA holding them till maturity.

MINT RBI will now use SDF as floor rate for LAF corridor.