Higher deficit liquidity increases RBI’s liquidity injection via VRR auctions

Higher deficit liquidity increases RBI’s liquidity injection via VRR auctions

The higher deficit liquidity in the banking system has pushed Reserve Bank of India (RBI) to inject liquidity in the system through variable rate repo auctions.

Currently, liquidity in the banking system is estimated to be in deficit of around Rs 1.88 lakh crore, as per RBI’s money market operation data.

The central bank has so far conducted nine variable rate repo (VRR) auctions so far this month to support liquidity in the banking system. According to the RBI data, the VRR auction were conducted worth Rs 6.25 lakh crore, of which Rs 5.51 lakh crore has been infused in the banking system.

Further, the reduction of CRR by the RBI in the December policy also helped to infuse durable liquidity in the system. With CRR cut, it was expected to infuse Rs 1.16 lakh crore liquidity in the banking system. It will be done in two tranches, of 25 bps each with effect from the fortnight beginning December 14, 2024 and December 28, 2024.

CRR is a percentage of a bank's deposits that must be kept with the central bank as a reserve. The RBI uses this tool to control inflation, money supply, and maintain liquidity in the economy.

The durable liquidity in the banking system will provide a shield from the outflows of foreign investors in equity market, experts said.

The liquidity in the banking system came under pressure due to heavy outflows on account of goods and services tax and advance tax payments. The banking system witness outflows of over Rs 3 lakh crore from the banking system on back of tax payments.

Former RBI Governor Shaktikanta Das, during post-policy press conference earlier this month, also said the central bank expects tight liquidity in the remainder of the financial year.