The Reserve Bank of India (RBI) on Friday announced another set of liquidity measures that will infuse Rs 1.25 lakh crore into the financial system.
The measures include a 90-day variable rate repo (VRR) operation amounting Rs 25,000 crore on January 30 and a three-year $/Rs buy/sell swap auction of $ 10 billion, which will be held on February 4. It will also purchase government securities worth Rs 1 lakh crore through open market operation (OMOs), across two tranches of Rs 50,000 crore each to be conducted on February 5 and February 12.
The announcement comes at a time when the liquidity in the banking system has been shrinking. According to Bloomberg data, the average liquidity stood at 1.78 lakh crore in November, which fell to Rs 72,550 crore in December and in January, it is further down Rs 57,121 crore.
Liquidity Drain
According to sources, market participants had also approached the central bank to provide relief as there was a sharp spike in certificate of deposit rates.
The continuous intervention in the forex market on account of weaker rupee has been draining out liquidity from the system. The increased demand for credit amid sluggish deposit growth has also created pressure on the banking system’s liquidity.
“This is much needed action from the RBI in the current scenario of elevated credit-deposit ratio and dollar sales to stabilise the currency,” said Madhavankutty G, chief economist, Canara Bank.
He added that in March, there will be more pressure on the liquidity, as there will be advance tax outflows. Moreover, short-term rates will spike further in absence of sufficient liquidity and that could be an impediment to monetary policy transmission.
He also explained that longer tenor forex swap signals durable liquidity and aligns with MPC comments that regulator will endeavour to provide liquidity when needed.
The RBI has been consistently infusing liquidity since December. It has injected 4.5 lakh crore into the system in December and January through OMOs and FX swaps. It has purchased bonds worth Rs 5.2 lakh crore in the current financial year.
From VRRs to Swaps
The RBI has included the term VRR from its liquidity tool kit this time, unlike earlier announcements. It aims to align short-term rates, which have surged amid tightened liquidity, said market participants.
As deposits growth lagged credit growth, banks have increasingly tapped the certificate of deposit (CD) market for funding requirements. According to Bloomberg data, the one-year CD rate jumped to 6.9% in January on higher supply, compared to an average of 6.55% in December.
“There was some pressure building up in the short-term rates. The 90-day VRR will ease the pressure, particularly given that January-February is always known for higher demand for credit,” said Soumyajit Niyogi, director – India Ratings & Research. However, he noted that it won’t substantially reduce bond yields, but rather cause a modest softening or prevent them from spiking further.
Market participants expect more such actions in March as well considering higher tax outflows in the month and on-going currency pressure.
“The RBI will continue to ensure ample liquidity in the system through its proactive actions. For FY26, I expect another Rs 50,000 crore – Rs 1 lakh crore. The government spending is expected to kick in, which could ease some further liquidity pressure,” said Niyogi.
The RBI said in the press release that it would continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions.