RBI Implements Measures to Address Liquidity Challenges

Source : Business Standard

The Reserve Bank of India (RBI) has introduced several measures to regulate liquidity conditions in the financial system. These include:

Open Market Operations (OMO): The RBI will conduct purchase auctions worth ₹60,000 crore to buy government securities. OMO is a monetary tool through which the central bank buys or sells securities in the open market to manage liquidity.
Variable Rate Repo (VRR) Auction: A 56-day VRR auction of ₹50,000 crore has been announced. VRR is a short-term liquidity adjustment mechanism that allows banks to borrow funds from the RBI at an interest rate determined through an auction. This is conducted under the Liquidity Adjustment Facility (LAF), where the RBI decides the auction amount and may conduct overnight or longer-term repo auctions at fixed or variable rates based on market conditions.
USD/Rupee Swap Auction: A $5-billion buy/sell swap auction with a six-month tenure will be held to manage foreign exchange liquidity.

Factors Contributing to Liquidity Shortages in Indian Banks

Lag Effect: Liquidity from government spending takes time to enter the banking system, causing temporary fluctuations.
Inflation Control Measures: The RBI sometimes keeps interest rates elevated to curb inflation, which can restrict liquidity.
Seasonal and Structural Factors: Increased cash withdrawals during festive seasons, coupled with slower deposit growth compared to credit expansion over the past year, have contributed to liquidity constraints.

These measures aim to balance liquidity in the banking system while ensuring financial stability.

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