RBI to Infuse Additional Rs 1.1 Lakh Crore to Boost Banking System Liquidity

Mumbai, Jan 27 (NationPress) The Reserve Bank of India (RBI) has declared its intention to infuse an additional Rs 110,000 crore into the banking framework through open market purchase auctions of Government securities and by executing a variable rate repo auction. Additionally, a $5 billion dollar-rupee swap auction is also set to occur to further enhance liquidity in the financial ecosystem.

The RBI noted that these actions were triggered after a comprehensive assessment of the prevailing liquidity and financial landscape.

The open market operations for purchasing Government of India securities will total Rs 60,000 crore, distributed across three tranches of Rs 20,000 crore each, scheduled for January 30, February 13, and February 20, 2025, as stated by the RBI.

A 56-day Variable Rate Repo (VRR) auction, amounting to Rs 50,000 crore, is scheduled for February 7, while the USD/INR Buy/Sell Swap auction of USD 5 billion for a tenure of six months will take place on January 31, 2025, according to the RBI announcement.

Specific guidelines for each operation will be shared separately, as added in the statement.

The Reserve Bank has also reassured that it will keep a close eye on changing liquidity and market conditions, taking necessary actions to maintain orderly liquidity.

Last week, the RBI consulted with banks to gauge the effects of its new liquidity coverage regulations amid concerns that this move could negatively impact credit flow in the economy.

Feedback from banks indicated requests for postponements of the regulations and alternative strategies to mitigate potential adverse impacts.

This initiative comes at a time when Sanjay Malhotra has recently assumed the role of the new RBI Governor, succeeding Shaktikanta Das, who concluded an extended term as head of the central bank in December.

Liquidity conditions have already tightened, as the banking sector faced a deficit exceeding Rs 3 lakh crore last week, despite the commencement of daily variable repo rate auctions by the RBI.

On July 25, the RBI released a draft circular requiring banks to allocate more capital to cover their risks starting April 1 this year.

The RBI emphasized that the banking sector has undergone rapid evolution in recent years. While the greater use of technology has facilitated instant bank transfers and withdrawals, it has simultaneously increased risks, necessitating proactive management strategies. The Liquidity Coverage Ratio (LCR) framework was reviewed to bolster the resilience of banks.

As part of this, banks must set aside an extra 5 percent of funds for retail deposits supported by internet and mobile banking services (IMB). Stable retail deposits with IMB will have a 10 percent runoff factor, while less stable deposits with IMB will incur a 15 percent runoff factor.

The LCR mandates that banks hold adequate high-quality liquid assets (HQLAs), primarily comprised of government securities, to navigate potential liquidity crises due to sudden fund withdrawals. The RBI has declined banks' requests to factor existing cash reserve ratios into HQLA estimations.

According to bank treasury officials, this could mean over Rs 4 lakh crore would need to be reallocated from banks to purchase government bonds, rather than extending credit to businesses and individuals in demand within the economy.

Banks have also approached the finance ministry to discuss the necessity of relaxing stringent RBI guidelines that could hinder credit growth.