Co-existence of deficit liquidity, heavy funds deployed in SDF show skewed distribution of liquidity: RBI Bulletin

Co-existence of deficit liquidity, heavy funds deployed in SDF show skewed distribution of liquidity

The Reserve Bank of India's (RBI) monthly bulletin released on February 19 said that the co-existence of deficit liquidity conditions and funds deployed under the SDF is indicative of skewed distribution of liquidity in the banking system.

Also, Bulletin said that it shows the behavioral aspects such as select banks’ reluctance to on lend in the uncollateratised call money market.

System liquidity has turned into deficit since mid-December 2024 due to build-up in government cash balances driven by the usual quarter-end advance tax outflows, monthly GST payments, capital outflows and currency leakage.

To assure market participants of the availability of sufficient liquidity on a day-to-day basis, the Reserve Bank introduced daily variable rate repo (VRR) auctions effective January 16, 2025, bulletin said.

In addition, one main 14-day VRR operation was conducted on January 24, 2025. Taking cognisance of the liquidity tightness, the Reserve Bank announced a slew of measures – open market operations, USD/INR buy/sell swap and longer-term VRR - on January 27, 2025 to meet the durable liquidity requirements of the banking system, bulletin added.

The open market purchase auction of government securities (G-secs) on January 30 and February 13, and the USD/INR buy/sell swap on January 31 together injected liquidity to the tune of approximately Rs 1.04 lakh crore. Besides, the Reserve Bank’s purchases of G-secs through the Negotiated Dealing System – Order Matching segment (NDS-OM)
during January injected durable liquidity of around Rs 0.39 lakh crore in the system.
The Reserve Bank conducted a 56-day VRR auction for a notified amount of Rs 50,000 crore on February 7, 2025, followed by a 49-day VRR auction for a notified amount of Rs 75,000 crore on February 14, 2025.

In addition, one OMO purchase auction of Government of India securities for an aggregate amount of Rs 40,000 crore is also scheduled on February 20, 2025, bulletin said.

On February 17, Moneycontrol reported that the 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.