The Reserve Bank of India (RBI) on Monday announced that it would inject another Rs 110,000 crore liquidity into the banking system through open market purchase auctions of Government securities and carrying out a variable rate repo auction.
Besides, a $5 billion dollar-rupee swap auction would also be held to provide more liquidity in the system.
The RBI said the move was in consonance with an assessment of liquidity and financial conditions at present.
Three tranches of Rs 20,000 crore will be conducted between January 30, February 13, and February 20, 2025, through which the RBI said it will make open market purchase auctions of Government of India securities for an aggregate amount of Rs 60,000 crore.
The RBI in its statement has said that there will be a 56-day VRR auction on February 7 for an amount of Rs 50,000 crore notified amount and the USD/INR Buy/Sell Swap auction for the tenor of six months, with the size of USD 5 billion, scheduled for January 31, 2025.
The RBI has added that detailed instructions for every operation would be separately issued.
The Reserve Bank of India also maintained that it continues to monitor evolving conditions in liquidity as well as market conditions and do as appropriate actions to ensure orderly conditions of liquidity remain in place.
The Reserve Bank of India earlier reached out to banks last week amid concerns that it was likely going to adversely affect the credit flow in the economy by restricting banks' ability to satisfy its new, higher liquidity norms.
Banks have given some feedback, sought deferment of the norms and alternative mechanisms to deal with the likely hit from these norms.
The move has been initiated at a time when Sanjay Malhotra has just taken 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 turned tight as the banking system was facing a deficit of over Rs 3 lakh crore last week despite the daily variable repo rate auctions that the RBI started carrying out last week.
The RBI had on July 25 issued a draft circular which will require banks to set aside more funds to cover their risks from April 1 this year.
In fact, the RBI said banking has undergone rapid transformation in recent years. While increased usage of technology has facilitated the ability to make instantaneous bank transfers and withdrawals, it has also led to a concomitant increase in risks, requiring proactive management.
It has reviewed the Liquidity Coverage Ratio framework to increase the resilience of banks.
More importantly, the banks have been instructed to allocate an additional 5% funds as a run-off factor for those retail deposits that are enabled with internet and mobile banking facilities (IMB). Stable retail deposits enabled with IMB shall have 10% run-off factor while less stable deposits enabled with IMB shall have 15% 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. RBI has rejected the request of banks to include their existing cash reserve ratios to estimate HQLAs.
Treasury officials of banks state that this would, in effect, mean that more than Rs 4 lakh crore would have to be diverted from the banks to buy government bonds rather than extend credit to corporates and individuals to demand in the economy.
Banks have also alerted the finance ministry on the need for easing stringent RBI guidelines likely to hit credit growth.
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