The Reserve Bank of India (RBI) announced on Monday that it would inject an additional ₹1.1 trillion liquidity into the banking system through open market purchase auctions of government securities and a variable rate repo auction. Additionally, a $5 billion dollar-rupee swap auction will be held to provide further liquidity.
The RBI stated that these measures were taken after a review of the current liquidity and financial conditions. The open market operations purchase auctions of Government of India securities, totaling ₹600 billion, will be conducted in three tranches of ₹200 billion each on January 30, February 13, and February 20, 2025.
A 56-day Variable Rate Repo (VRR) auction for a notified amount of ₹500 billion will be held on February 7, while the USD/INR Buy/Sell Swap auction of $5 billion for a tenor of six months will be held on January 31, 2025, according to the RBI statement. Detailed instructions for each operation will be issued separately.
The RBI also mentioned that it will continue to monitor evolving liquidity and market conditions and take appropriate measures to ensure orderly liquidity conditions. Last week, the RBI contacted banks to understand the impact of its new liquidity coverage norms, following concerns that the move could adversely affect the flow of credit in the economy.
Banks have provided feedback, requested deferment of the norms, and suggested alternative mechanisms to cope with the likely impact of these norms. This move comes as Sanjay Malhotra takes over as the new RBI Governor, succeeding Shaktikanta Das, who completed an extended tenure as head of the central bank in December.
Liquidity has already tightened, with the banking system facing a deficit of over ₹3 trillion last week, despite the daily variable repo rate auctions conducted by the RBI. On July 25, the RBI issued a draft circular requiring banks to set aside more funds to cover their risks from April 1 this year.
The RBI noted that banking has undergone rapid transformation in recent years. While increased use of technology has facilitated instantaneous bank transfers and withdrawals, it has also led to a concomitant increase in risks, requiring proactive management. The RBI has reviewed the Liquidity Coverage Ratio (LCR) framework to increase the resilience of banks.
Banks have been directed to assign an additional 5 percent funds as a run-off factor for retail deposits enabled with internet and mobile banking facilities (IMB). Stable retail deposits enabled with IMB shall have a 10 percent run-off factor, and less stable deposits enabled with IMB shall have a 15 percent run-off factor.
LCR requires banks to maintain sufficient high-quality liquid assets (HQLAs), comprising mainly government securities, to manage a potential liquidity crunch due to any sudden withdrawal of funds. The RBI has rejected banks’ requests to include their existing cash reserve ratios to estimate HQLAs.
According to treasury officials of banks, this would effectively mean over ₹4 trillion would have to be diverted from banks to buy government bonds instead of extending credit to corporates and individuals to meet demand in the economy. Banks have also informed the finance ministry of the need to ease stringent RBI guidelines, which are likely to impact credit growth.
