The Reserve Bank of India’s (RBI) ongoing liquidity measures, including open market operations (OMOs), forex swaps, and variable rate repo (VRR) auctions, are expected to ease liquidity pressures in the banking system despite upcoming outflows from advance tax and GST payments.
The central bank’s recent OMO purchase of Rs 50,000 crore saw bids worth over Rs 1.01 lakh crore, reflecting strong demand from banks for liquidity infusion.
Liquidity conditions, which had improved marginally in early March due to a $10-billion forex swap on February 28 that injected nearly Rs 85,000 crore, tightened again by mid-March.
The liquidity deficit, which breached Rs 2 lakh crore in the second half of the month, peaked at Rs 2.42 lakh crore on March 17. This comes after the deficit had touched Rs 3.15 lakh crore on January 11 due to the RBI’s aggressive forex market interventions.
RBI firefight
Since mid-January, the RBI has deployed multiple tools to address liquidity stress. These include a 50 basis points cut in the cash reserve ratio (CRR) in December, releasing Rs 1.16 lakh crore into the system, along with regular VRR auctions, dollar-rupee buy/sell swaps, and OMO purchases worth Rs 1 lakh crore. These measures have kept the liquidity deficit in the range of Rs 1.5 lakh crore to Rs 2 lakh crore through February.
Looking ahead, while advance tax and GST outflows in the coming weeks may tighten liquidity further, the RBI’s proactive steps could shift the system towards a surplus.
With ongoing liquidity management, the central bank is likely to ensure that overnight rates remain stable despite the near-term tightening. The consistent efforts to inject liquidity suggest that the RBI is inclined to steer the system towards a more balanced liquidity position, potentially moving it into a small surplus over time.
