Amid high liquidity deficit, RBI may continue heavy liquidity infusion

liquidity

The Reserve Bank of India (RBI) is expected to continue record fund infusion in the banking system as liquidity deficit is expected to widen, experts said.

“Based on recent actions and stance of RBI on liquidity, we expect them to continue to infuse liquidity into the system on an ongoing basis through this quarter,” said Anshul Chandak, Head of Treasury at RBL Bank.

Adding to this, Umesh Kumar Tulsyan, Managing Director of Sovereign Global Markets, a New Delhi-based fund house said the RBI is strongly manoeuvring the liquidity situation using multiple tools such as VRR, OMO,  dollar/rupee buy/sell swaps, etc. This, while global uncertainties and tax outflows are not giving confidence that the situation may moderate.

In the last few days, the central bank has been infusing record funds in the banking system through daily variable rate repo (VRR) auctions. The demand for funds during the auction also remains high from banks due to higher deficit liquidity in the banking system.

Between February 10 and February 14, the central bank has infused Rs 9.81 lakh crore through daily VRR auctions. Additionally, they infused Rs 40,000 crore through open market operations (OMO) purchases of government securities, and Rs 75,003 crore via 49-day VRR auction.

This was infused when the liquidity deficit in the banking system remained in the range of Rs 1.91 lakh crore to Rs 2.42 lakh crore.

The liquidity infusion was in line with the assurance given by the RBI Governor Sanjay Malhotra during the post- policy press conference. Malhotra has said that the central bank will provide as much liquidity as is required to the banking system both in terms of overnight and durable liquidity.

Liquidity in the banking system has been under stress in the last few weeks due to reasons such as tax outflows, heavy intervention by RBI in the forex market to sell dollars, and less government spending.

To support liquidity, the central bank has announced slew of measures such as open market operations (OMO) purchases, USD/INR Buy Sell swap auction and daily variable rate repo (VRR).

Going ahead, Kotak Mahindra Bank in their report dated February 10 said that core liquidity to again turn deficit from March warranting more measures by the RBI then.

On this, Mataprasad Pandey, Vice-President of Arete Capital Service said will persist in using all available liquidity management tools ,such as longer- duration  VRRs ,OMO purchases along with daily VRRs.