RBI’s Liquidity Measures to Ease Banking Deficit

Current Affairs National

Posted by newadmin on 2025-01-29 09:28:34 |

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

One of the key measures introduced by the RBI is a $5 billion USD/INR buy/sell swap auction with a six-month tenor. Under this arrangement, banks sell US dollars to the RBI in exchange for rupee funds credited to their 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 designed to manage currency liquidity without directly affecting foreign exchange reserves.

Additionally, the RBI will conduct open market operation (OMO) purchase auctions of government securities (G-Secs) amounting to ₹60,000 crore. These purchases will be carried out through three separate auctions of ₹20,000 crore each on January 30, February 13, and February 20. By acquiring government securities, the RBI aims to infuse liquidity into the banking system and stabilize government bond yields, which have recently reached a three-year low.

Another crucial step in the liquidity-enhancing plan is the introduction of a 56-day variable rate repo (VRR) auction for ₹50,000 crore. This auction will enable banks to borrow funds from the RBI, offering them greater flexibility in managing their liquidity needs. The extended tenor of this auction marks a shift in the RBI’s approach to liquidity management, with the first auction scheduled for February 7, 2025.

Economists suggest that these liquidity measures could potentially lead to a reduction in interest rates. The RBI’s proactive approach is seen as a precursor to possible repo rate cuts. The central bank’s rate-setting committee is set to meet in early February, and market analysts expect that the improved liquidity conditions may prompt the RBI to consider easing policy rates.

The RBI has reaffirmed its commitment to closely monitoring liquidity conditions as the deficit is projected to peak at ₹4 lakh crore by March 2025. With these measures, the central bank aims to maintain liquidity at levels that support economic stability and growth while ensuring that the banking sector remains well-capitalized and resilient.

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