The Reserve Bank of India (RBI) conducted a seven-day variable rate repo auction, injecting over Rs 1.41 lakh crore of transient liquidity into the banking system. This move came as the banking system faced a deficit of Rs 19,971.89 crore on June 22, a shift from the surplus of Rs 30,685.11 crore on June 21. Analysts attributed the liquidity tightening to outflows from banks due to goods and services tax (GST) payments.
The decline in liquidity led to pressure on overnight money market rates, with the weighted average call money rate reaching 5.43 per cent, 0.18 per cent higher than the RBI’s repo rate. When liquidity tightens, short-term money market rates can exceed the RBI’s standard repo rate, impacting the financial system. To alleviate funding pressures and ensure smooth credit flow, the RBI intervenes with liquidity injections during such situations.
The RBI regularly manages short-term deficits caused by events like tax outflows through monetary tools and market operations. VRR auctions, including 3-day or 7-day tenors, are common methods to infuse transient liquidity. Banks pledge eligible government securities in these auctions to borrow funds directly from the central bank, providing immediate relief during liquidity deficits. Additionally, the RBI purchases government securities from the secondary market to inject durable liquidity into the system, aiding banks in meeting their Cash Reserve Ratio (CRR) requirements.
In certain cases, the RBI conducts USD-INR swap auctions to stabilize the money market. For instance, by temporarily buying US dollars in exchange for rupees, the RBI increases the rupee supply, preventing spikes in overnight interest rates and ensuring market stability.
