RBI Report: Deficit liquidity and SDF funds highlight skewed liquidity distribution

Reserve Bank of India

The Reserve Bank of India’s (RBI) January bulletin, released on January 17, highlighted that the co-existence of deficit liquidity conditions and funds deployed in the Standing Deposit Facility (SDF) indicates a skewed distribution of liquidity in the banking system.

Despite tighter liquidity, banks continued to place funds in the SDF, with an average of Rs 0.83 lakh crore during the period from December 16, 2024, to January 14, 2025—remaining unchanged from the previous month, according to the RBI report.

Additionally, the report noted that while banks are accessing liquidity from the RBI, they are not onlending to the money markets. The daily average recourse to the Marginal Standing Facility (MSF) was Rs 0.10 lakh crore during this period, which included a near three-month high of Rs 44,652 crore on January 8, 2025.

The RBI Bulletin, a monthly publication, provides insights into developments in the domestic and global economies but does not reflect the views of the central bank.

Liquidity in the banking system came under pressure due to various factors, such as tax outflows and the RBI’s intervention in the forex market to stabilise the rupee.

The banking system saw outflows of over Rs 3 lakh crore as tax payments. On the other hand, the RBI intervention in forex market, costing around $60 billion, to stabilise the rupee, also put pressure on liquidity.

Usually, when the central bank intervenes in the forex market, it sells dollars and buys rupee, which removes liquidity from the banking system. The intervention is done through banks, and, hence, there is a always strain on liquidity in the banking system.

The Reserve Bank cumulatively injected Rs 12.55 lakh crore to the banking system via two main and sixteen fine-tuning variable rate repo (VRR) operations of 1-7 days maturity during December 16, 2024 to January 16, 2025.

Further, on a review of current and evolving liquidity conditions, it was also decided to conduct VRR auctions on all working days in Mumbai with reversal taking place on the next working day until further notice.

Overall, the average daily net injection under the liquidity adjustment facility (LAF) stood at Rs 1.55 lakh crore during this period in contrast to the average net absorption of Rs 0.62 lakh crore recorded during November 16 to December 15, 2024.