In response to the escalating liquidity deficit within the banking system, the Reserve Bank of India (RBI) has announced a substantial liquidity infusion of Rs 2.50 lakh crore through a 15-day variable rate repo (VRR) auction. The move comes as the overall liquidity shortfall in the banking system has surged to Rs 3.34 lakh crore as of January 23, up from Rs 1.29 lakh crore at the beginning of the year.
The liquidity landscape includes various elements such as VRR auctions, funds drawn from the marginal standing facility, surplus funds lodged at the standing deposit facility, and liquidity introduced by the RBI through various long-term repo operations carried out amid the Covid-19 challenges in 2021.
The current month witnessed the largest liquidity infusion by the central bank, amounting to Rs 1.75 lakh crore through a 13-day VRR on January 12. Banks are grappling with liquidity challenges due to outflows linked to GST payments and advances tax in the preceding month.
Widening crunch
The competitive landscape for resource mobilization is further intensified by non-banking finance companies (NBFCs), which offer relatively higher returns, reaching up to 10%, through non-convertible debentures. This stands in contrast to the 6.50-7.25% range offered by banks for over a one-year tenor on term deposits. The ongoing surge in activity within equity markets, marked by increased retail investor participation in initial public offerings and mutual funds, continues to contribute to the liquidity squeeze.
Despite significant cash reserves amassed by the Central government from Goods and Services Tax (GST) and advances, which remain largely untapped, the persistent liquidity crunch is driving the need for such interventions.
This liquidity tightness, observed for the first time in the fiscal year 2024, prompts considerations of potential adjustments to the monetary policy stance.
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