The Reserve Bank of India will continue to infuse durable liquidity into the banking system and there is an expectation that the central bank may announce longer tenure variable rate repo (VRR) auction too, economists have said.
A Variable Rate Repo (VRR) liquidity adjustment allows banks to borrow at a rate determined through an auction, rather than fixed rate.
“Durable liquidity may come under slight seasonal bump in the coming days with pickup in economic activity following starting of sowing season from June onwards. We could also see some longer tenor VRR announcements in the coming days,” said Dipanwita Mazumdar, Economist at Bank of Baroda.
In the last few months, the central bank is infusing durable liquidity to the banking system through open market operations (OMO) purchases and USD/INR Buy/Sell swap auctions. Along with this, they were also supporting liquidity through daily VRR auctions.
The heavy liquidity infusion was due to existing cash in the banking system starting to fall into deficit from mid-December last year. Liquidity operations have helped banking system to turned surplus, as currently, banking system has surplus of around Rs 3 lakh crore.
Experts said the focus of liquidity management is on enhancing the transmission of monetary policy. To enable this, the RBI has allowed the operative rate - the weighted average call rate - to be closer to the SDF, which is at the lower end of the policy rate corridor.
The central bank has reduced repo rate by 50 basis points (cps) between February and April, and sought liquidity surplus for better transmission of rates.
The RBI Governor Sanjay Malhotra during the April monetary policy had said that the central bank is committed to provide sufficient system liquidity in the banking system. “We will continue to monitor the evolving liquidity and financial market conditions and proactively take appropriate measures to ensure adequate liquidity.”
During the June MPC review, the central bank is expected to cut benchmark rate by another 25 bps rates, according to Moneycontrol’s poll of economists and treasury heads.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
