RBI’s Liquidity Measures

January 28, 2025

The Reserve Bank of India (RBI) has recently intensified its efforts to enhance liquidity in the banking system. This initiative comes in response to liquidity deficit, which has been exacerbated by tax outflows and constrained government spending. The central bank’s measures aim to inject approximately ₹1.5 lakh crore into the banking sector, beginning on January 30 and concluding on February 20, 2025.

Key Liquidity Measures Announced

The RBI has introduced several critical measures. These include:

A $5 billion USD/INR buy/sell swap auction with a six-month tenor.
Conducting open market operation (OMO) purchase auctions of government securities (G-Secs) totalling ₹60,000 crore.
Holding a 56-day variable rate repo (VRR) auction for ₹50,000 crore.

These actions are designed to provide a substantial liquidity cushion to the banks.

About the USD/INR Buy/Sell Swap

In the USD/INR buy/sell swap, banks sell US dollars to the RBI.
In return, the RBI credits rupee funds to the banks’ current accounts.
After six months, the banks will return the rupee funds along with a swap premium to reclaim the US dollars.
This mechanism is crucial for managing currency liquidity without affecting the foreign exchange reserves directly.

Open Market Operations

The OMO involves the RBI purchasing government securities from the market. This process injects liquidity into the banking system. The RBI plans to conduct three auctions of ₹20,000 crore each on January 30, February 13, and February 20. These purchases are expected to stabilise government bond yields, which have recently reached a three-year low.

Variable Rate Repo Auctions

The 56-day variable rate repo auction will allow banks to borrow funds from the RBI, offering flexibility in managing their liquidity needs.
This auction is notable for its extended tenor, marking a shift in the RBI’s approach to liquidity management.
The first VRR auction is scheduled for February 7, 2025.

Impact on Interest Rates

Economists predict that these liquidity measures may lead to a reduction in interest rates. The RBI’s liquidity push is seen as a precursor to potential repo rate cuts. The rate-setting committee is scheduled to meet in early February, and market analysts anticipate that the RBI will consider a rate reduction in light of the improved liquidity conditions.

Monitoring Liquidity Conditions

The RBI has emphasised its commitment to monitoring the evolving liquidity landscape. As the liquidity deficit is projected to peak at ₹4 lakh crore by March, the central bank’s proactive measures are essential. The RBI aims to ensure that liquidity remains orderly and conducive to economic growth.

« Previous Post Next Post »