The Reserve Bank of India (RBI) will infuse R10,000 crore into the system through open-market operations (OMO) next week to ease liquidity constraints. Based on the current assessment of prevailing and evolving market conditions, the RBI will purchase government securities for an aggregate amount of R10,000 crore on October 7, said the central bank in a press release on Monday.
The liquidity infusion comes against the backdrop of high bank borrowings from the RBI's Marginal Standing Facility (MSF) window where banks can borrow funds from the central bank at 9.50%. The RBI lowerd the MSF rate from 10.25% to 9.50% at its mid-quarter review of monetary policy earlier this month.
Banks have been borrowing heavily from the MSF window since borrowings from the RBI's cheaper liquidity adjustment facility (LAF) were capped at 0.5% of each individual bank's deposit base. On Friday, banks borrowed R82,658 crore from the window and average borrowings have stayed between R60,000 crore and R80,000 crore over the past fortnight. Borrowings had hit a record high of R1.42 lakh crore on September 16.
The tightness in liquidity has been attributed to a pick-up in demand for working capital from corporates and a rise in retail lending ahead of the festive season. This had pushed up credit growth to above 18% during the fortnight of September 6, while deposit growth has been lagging behind at close to 13%.
Tight liquidity conditions have also been one reason that the benchmark 10-year bond yield rose to 8.76% on Monday.
Taking note of the tight liquidity conditions, RBI last we-ek assured the market of measures to maintain appropriate liquidity conditions. “RBI is closely and continuously monitoring liquidity conditions and will take actions as appropriate, including open market operations, to ensure that adequate liquidity is available to support the flow of credit to productive sectors of the economy,” it said on September 25.