SBI Calls RBI's Liquidity Measures Pragmatic and Intelligent
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Synopsis
SBI's research report indicates that upcoming changes in the RBI Liquidity Management Framework, initiated by the daily dynamic VRR, are essential to tackle the ongoing liquidity issues in the banking system. The report highlights the challenges and strategies being employed to effectively manage liquidity.
Key Takeaways
- RBI's introduction of daily dynamic VRR as a key liquidity management tool.
- Need for a balanced approach between temporary and permanent liquidity measures.
- Challenges in maintaining effective liquidity management within the banking system.
- Concerns regarding liquidity drain due to forex interventions.
- Potential for long-term buy-sell swaps to improve reserves.
Mumbai, Jan 20 (NationPress) Anticipated modifications to the RBI Liquidity Management Framework are forthcoming as the implementation of the daily dynamic VRR marks the initial measure to regulate liquidity within the banking sector, as highlighted by an SBI research report.
“These adjustments and the anticipation of subsequent actions are both intelligent and pragmatic from the RBI… A careful blend of temporary and enduring liquidity injection and withdrawal is still evolving,” the report indicates.
As a result of interventions in the forex markets alongside fluctuating government cash balances, the liquidity in the banking sector is diminishing and has alarmingly surpassed comfortable levels.
This ongoing liquidity dilemma, combined with expectations of a rally in DXY, has led the regulator to reinstate the daily dynamic VRR (variable rate repo) to manage liquidity effectively within the revised LMF (Liquidity Management Framework) that was introduced in February 2020.
Although these daily VRR transactions represent temporary liquidity injections, repo transactions should ideally offset changes in government cash balances. Nonetheless, they are also compensating for a persistent shortfall in durable liquidity caused by currency leakage and the liquidity effects of RBI forex interventions, the report notes.
“To counter this, in a clever maneuver, the RBI has initiated sales in Spot and NDF forwards while also engaging in short-term buy-sell swaps to substitute for the maturing forward sale position and address the ongoing durable liquidity drain from spot interventions. We also anticipate that the RBI may introduce longer-term (2-3 years) buy-sell swaps to bolster reserves and enhance liquidity,” the SBI report suggests.
In essence, liquidity management continues to face operational hurdles such as enhancing market microstructure, accurately gauging liquidity tightness within the system, and, most crucially, achieving a careful balance of effective durable and transient liquidity injections or withdrawals, as the report emphasizes.
The report asserts that the liquidity situation has remained constrained, shifting to an injection mode since December 16, 2024, due to various factors including tax outflows, GST payments, forex market interventions, and fluctuations in capital flows. Additionally, the implementation of Just in Time (JIT) has affected system liquidity through variations in government cash balances.
System liquidity transitioned from a surplus of Rs 1.35 lakh crore in November to a deficit of Rs 0.65 lakh crore in December, further escalating to a Rs 1.58 lakh crore deficit in January (as of January 16). The injection-absorption ratio has risen to approximately 4X, indicating continued borrowings from the LAF window, the report concluded.
