The Reserve Bank of India (RBI) has announced plans to inject Rs 1.1 lakh crore into the banking system to improve liquidity. This move includes open market purchase auctions of government securities and a variable rate repo auction. Additionally, a $5 billion dollar-rupee swap auction will be conducted to enhance liquidity further.
The RBI’s decision comes after reviewing the current financial and liquidity conditions. The central bank plans to conduct open market operations (OMO) purchase auctions for Rs 60,000 crore of government securities in three tranches of Rs 20,000 crore each. These auctions are scheduled for January 30, February 13, and February 20, 2025.
On February 7, a 56-day Variable Rate Repo (VRR) auction worth Rs 50,000 crore will be held. Additionally, a USD/INR Buy/Sell Swap auction for $5 billion with a six-month tenor is scheduled for January 31, 2025. Detailed instructions for each operation will be provided separately, the RBI stated.
Monitoring Liquidity Conditions
The RBI has assured that it will closely monitor evolving liquidity and market conditions. It aims to take necessary steps to maintain orderly liquidity in the banking system. This move aligns with the RBI’s commitment to ensuring financial stability.
Recently, the RBI introduced new liquidity coverage norms requiring banks to allocate more funds to manage risks. Banks have expressed concerns over the potential impact of these norms on credit flow in the economy. They have requested a delay in implementation and suggested alternative mechanisms to address the challenges.
Under the revised Liquidity Coverage Ratio (LCR) framework, banks must hold high-quality liquid assets (HQLAs), primarily government securities, to prepare for sudden fund withdrawals. However, the RBI has declined banks’ requests to include existing cash reserve ratios in HQLA calculations.
Impact of New Guidelines on Banks
The new guidelines require banks to assign additional funds for retail deposits with internet and mobile banking (IMB) facilities. Stable deposits with IMB will have a 10% run-off factor, while less stable deposits will have a 15% factor.
Treasury officials estimate that banks may need to divert over Rs 4 lakh crore to purchase government bonds under these guidelines. This could reduce funds available for credit to corporates and individuals, potentially impacting economic demand.
New RBI Governor and Tight Liquidity
The announcement comes as Sanjay Malhotra takes over as the new RBI Governor, succeeding Shaktikanta Das. Liquidity in the banking system has already tightened, with a deficit of over Rs 3 lakh crore reported last week despite daily variable repo rate auctions.
The RBI’s measures aim to stabilize the banking system and address liquidity challenges. While these steps reflect proactive risk management, banks are urging for more flexible norms to balance liquidity and credit growth.
