RBI’s Liquidity Injection Measures

Syllabus :GS3/Economy

In News

• The Reserve Bank of India (RBI) has announced enhanced liquidity measures to address contraction in the banking system.

Steps Taken

• Swap auction: RBI will conduct a six-month USD/INR buy/sell swap auction worth $5 billion, with the first leg on January 31, 2025.
  • This involves banks selling US dollars to the RBI in exchange for rupee funds, to be reversed after six months with a premium.
• OMO Purchases: The RBI will conduct open market operation (OMO) purchase auctions of Government Securities (G-Secs) totaling ₹60,000 crore in three tranches of ₹20,000 crore each on January 30, February 13, and February 20, 2025.
• VRR Auction: A 56-day Variable Rate Repo (VRR) auction for ₹50,000 crore will be held.
  • This is the first time such a long-tenor VRR auction is being conducted.

Need and Objectives 

• The measures are expected to infuse around ₹1.50 lakh crore into the banking system in a phased manner, from January 30 to February 20, 2025, providing much-needed durable liquidity to address the liquidity deficit in the banking system.
  • The liquidity deficit was exacerbated by a sharp depreciation of the rupee and reduced government spending.
• The RBI’s actions are in response to liquidity tightness due to tax outflows and limited government spending, with the liquidity deficit estimated at ₹3 lakh crore.

Challenges 

• The government’s over-borrowing and investing surplus cash could impact liquidity management, leading to prolonged surplus or deficit cash positions.
• This weak cash management could have negative consequences for RBI’s debt management, liquidity, and overall monetary policy.

Suggestions and Way Forward 

• The continued fiscal imbalance between surplus/deficit cash positions requires greater coordination between RBI and the government to prevent negative impacts on monetary and liquidity management.
• The RBI is committed to agile and flexible liquidity management to support economic stability.
• The recent measures highlight RBI’s proactive approach to ensuring sufficient liquidity in the banking system to stabilize financial conditions.
• The RBI will monitor evolving liquidity and market conditions and adjust measures as needed to ensure orderly liquidity in the system.

Source :TH