Mumbai, June 23: The Reserve Bank of India (RBI) has injected over ₹1.41 lakh crore into the banking system through a seven-day Variable Rate Repo (VRR) auction to enhance temporary liquidity.
According to data released by the RBI, funds were infused at a cut-off rate of 5.26 percent and a weighted average rate.
This action was taken after the banking system’s liquidity shifted from a surplus of ₹30,685.11 crore on June 21 to a deficit of ₹19,971.89 crore on June 22.
Experts suggest that the decline in liquidity was due to cash outflows from banks related to Goods and Services Tax (GST) payments.
The reduction in liquidity has increased pressure on overnight money market rates. The weighted average call money rate is currently trading at 5.43 percent, which is 0.18 percent above the RBI’s repo rate.
If banking liquidity diminishes significantly due to factors like GST payments, short-term money market rates, such as the weighted average call money rate, could exceed the RBI’s standard repo rate.
By injecting liquidity, the RBI aims to alleviate short-term funding pressures and ensure a smooth flow of credit in the financial system without triggering an economic downturn.
The central bank periodically manages short-term liquidity shortages caused by tax payments, advance tax payments, or seasonal credit demand by infusing liquidity into the banking system through various monetary tools and market operations.
The RBI frequently conducts VRR auctions to inject substantial liquidity for short periods, typically involving three to seven days.
When liquidity tightens, banks can directly borrow funds from the RBI by pledging government securities, providing them with immediate relief.
To ensure long-term liquidity in the system, the RBI purchases government securities from the secondary market. This action permanently injects cash into the banking system, allowing banks to easily meet their Cash Reserve Ratio (CRR) requirements.
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