RBI to inject as much liquidity as required by banks

Reserve Bank of India

The Reserve Bank of India (RBI) will provide as much liquidity as is required to the banking system both in terms of overnight and durable liquidity, said governor Sanjay Malhotra. In a post-policy press conference, he said that the job of the central bank is to provide whatever liquidity requirements are needed.

These comments are important in the backdrop of there being no liquidity announcement in the monetary policy despite the fact that liquidity is likely to slip into higher deficit in March on account of tax outflows and likely continuation in the forex intervention of the RBI.

Liquidity in the banking system has been under stress in the last few weeks due to reasons such as tax outflows, heavy intervention by RBI in the forex market to sell dollars, and less government spending.

To support liquidity, the central bank has announced slew of measures such as open market operations (OMO) purchases, USD/INR Buy Sell swap auction and daily variable rate repo (VRR).

The higher liquidity deficit led to an increase in overnight night rates above the repo rate. The deficit started around December 16 following which the RBI supported liquidity through VRR auctions with shorter tenures.

Initially, the RBI was injecting liquidity through routine VRR auctions, then on January 16 it announced daily VRR auctions and followed it up with a slew of measures to ease the pressure.

The central bank has injected Rs 28.27 lakh crore through VRR auctions. Of this, Rs 14.65 lakh crore was through daily VRR auctions and the remaining Rs 13.62 lakh crore through general VRR auctions.

The central bank also pumped in 20,020 crore through OMO purchases.

Today, banking sector stocks struggled as there was no major liquidity announcement in the monetary policy. Banking sector stocks struggled as the RBI’s monetary policy lacked additional liquidity-easing measures. ICICI Bank and SBI led the decline, dragging the Nifty Bank index down 0.5 percent.