RBI commits to ensuring liquidity but stops short of new measures, Guv Malhotra flags passive bank funds

RBI Governor Sanjay Malhotra said that the system liquidity moved into deficit during December 2024 and January 2025.

The Reserve Bank of India (RBI) highlighted a shift from surplus to deficit in system liquidity in recent months, while Governor Sanjay Malhotra reaffirmed the central bank’s commitment to provide sufficient system liquidity, and take appropriate measures to ensure orderly liquidity conditions. However, the RBI did not announce any further immediate measures on this front.

According to the RBI Governor’s monetary policy statement, system liquidity, measured by the average net position under the liquidity adjustment facility (LAF), moved into deficit during December 2024 and January 2025. Malhotra attributed this primarily to advance tax payments in December, capital outflows, foreign exchange operations, and a significant rise in currency circulation in January.

In response to these tightening liquidity conditions, the RBI recently announced a series of measures to inject liquidity into the banking system. These included daily variable rate repo auctions starting from January 16 and purchasing government securities worth Rs 58,835 crore through open market operations (OMOs) in January.

Additionally, a comprehensive liquidity injection package was announced on January 27, which included further OMOs, a forex buy-sell swap, and a 56-day variable rate repo conducted today. These steps reflect the RBI’s proactive stance in managing liquidity while ensuring market stability.

The RBI Governor said that some banks have shown reluctance to on-lend in the uncollateralised call money market, opting instead to passively park funds with the central bank. Governor Malhotra urged banks to actively trade among themselves in the uncollateralised call money market to enhance market depth and improve signal extraction from the weighted average call money rate (WACR).

He said that the The Credit Deposit Ratio (CD ratio) for the banking
system at the end of January 2025 was at 80.8 per cent, broadly similar to that at the end of September 2024, calling the banks' financial parameters 'healthy'.

“The Reserve Bank is committed to providing sufficient system liquidity,” the statement said. “We will continue to monitor evolving liquidity and financial market conditions and proactively take appropriate measures to ensure orderly liquidity conditions.”

The RBI’s Monetary Policy Committee cut the repo rate 25 basis points to 6.25 percent, as was widely expected, but maintained a neutral stance. The rate cut was driven by easing inflation and slow growth recovery, while global financial volatility and trade uncertainties prompted the MPC to retain flexibility in responding to future macroeconomic changes.