MUMBAI: The Reserve Bank of India (RBI) infused slightly over Rs40,000 crore into the banking system on Thursday through two separate operations, targeting a liquidity deficit that surpassed Rs2 lakh crore.
This move underscores the central bank’s efforts to stabilise the financial system and ensure sufficient funds for economic activities.
The liquidity gap, which reached Rs2.2 lakh crore as of Wednesday, reflects a mismatch between the banking sector’s demand for and supply of funds. This shortfall can arise from factors such as large outflows for tax payments, government borrowing, or cyclical requirements like the festive season.
By injecting liquidity, the RBI aims to ease stress on banks, moderate short-term interest rates, and maintain overall market stability.
Overnight Variable Rate Repo (VRR)
The RBI accepted Rs30,760 crore worth of bids from Rs50,000 crore VRR auction at a weighted average rate of 6.51 per cent. Variable rate repo operations allow banks to borrow funds temporarily by pledging securities, enabling them to meet short-term liquidity needs.
An additional Rs9,892 crore was injected through a government securities buyback operation, where the RBI repurchased securities from banks to provide funds. However, the RBI accepted only 33 per cenrt of the notified amount of Rs30,000 crore, rejecting bids made at higher rates, signaling its intent to control costs.
Why the measures are crucial
The banking system’s liquidity deficit has persisted, with an average shortfall of Rs1.5 lakh crore in January, according to RBI data. Such deficits can lead to tighter monetary conditions, increasing borrowing costs for banks and affecting credit availability for businesses and consumers.
By conducting VRR auctions, the RBI temporarily provides funds to banks, ensuring they have adequate liquidity to meet reserve requirements and sustain lending operations. Simultaneously, buyback operations help inject liquidity while managing interest rate volatility in the debt markets.
Outlook and next steps
The RBI has announced another daily VRR auction for Rs50,000 crore on Friday, with a reversal scheduled for Monday, indicating its readiness to address short-term liquidity needs dynamically.
Economists suggest that varying demand for funds across banks reflects differing liquidity positions, with some lenders already having borrowed in earlier VRR auctions.
The auctions are part of the RBI’s strategy to manage liquidity systematically. While the deficit is high, some banks appear to have sufficient funds due to earlier borrowings or lower
The buyback operation, introduced in May after a six-year hiatus, has been used selectively to inject liquidity without fueling excessive volatility. In a similar operation on January 9, the RBI accepted 76.8 per cent of the notified amount, compared with 33 per cent this time, signaling its nuanced approach to balancing liquidity and rate stability.
Balancing Act
The RBI’s interventions highlight its dual mandate of maintaining financial stability while ensuring liquidity remains aligned with monetary policy objectives. By addressing immediate liquidity concerns, the central bank reduces the risk of market disruptions and ensures credit flows to sustain economic momentum.
