Under Malhotra, RBI has pumped in Rs 43 lakh crore in banking system to meet liquidity needs 

Sanjay Malhotra

The Reserve Bank of India (RBI) has injected around Rs 43.21 lakh crore in the banking system since the new governor Sanjay Malhotra took charge in December to navigate the challenging liquidity conditions in the past four months.

These funds were infused through a mix of options such as the normal variable rate repo (VRR) auctions worth Rs 16.38 lakh crore, daily VRR auctions of Rs 25.79 lakh crore, open market operation (OMO) purchase of government securities of Rs 60,020 crore and foreign currency (USD/INR) Buy Sell swap auction of approximately Rs 45,000 crore, according to the RBI data.

Most of the infusions were through short tenure VRR auctions. These instruments typically mature the next day and allow the central bank to conduct another auction with higher amount.

Malhotra took over as the RBI Governor on December 11, just when liquidity started dipping due to tax outflows, limited spending by the government and heavy intervention by the central bank in forex market to support the rupee.

According to the RBI data, liquidity deficit in the banking system has swung from Rs 30,000 crore on certain days to as high as Rs 3 lakh crore between December 16 and February 14.

The cash shortfall intensified after December 16 because of outflows of over Rs 3 lakh crore due to tax payments. This was despite the RBI reducing cash reserve ratio (CRR) from 4.5 percent to 4 percent in December in anticipation of tight liquidity. While the reduction in CRR helped the system with Rs 1.16 lakh crore, it wasn't enough in the light of RBI’s intervention in the forex market, which cost more than $75 billion, to stabilise the rupee.

The shortfall put pressure on the overnight money market rates, which traded above the RBI’s repo rate. Weighted average call money rates traded in the 6.6 percent to 6.74 percent range since the liquidity turned deficit.

The measures taken by the RBI prevented the overnight rate or call money rate from shooting up but it still remains slightly above the repo rate.

Usually, higher overnight rates push up the cost of borrowings for corporates and banks, especially those raising funds for the short term to meet their working capital and funding needs.

The liquidity-infusion measures are in line with the assurance given by Malhotra after during the first post- policy press conference on February 7.

Malhotra has said the central bank will provide as much liquidity as is required to the banking system both in terms of overnight and durable liquidity.