The Reserve Bank of India will conduct large money market operations worth over Rs 2 lakh crore in the coming three weeks to inject liquidity into the banking system. The decision was taken on Friday after a review of current liquidity and financial conditions.
The central bank has scheduled a 90-day Variable Rate Repo (VRR) operation of Rs 25,000 crore on Jan. 30. A VRR is a tool where banks borrow short-term funds through an auction, with the interest rate determined by market bids, not fixed in advance.
A dollar-rupee buy/sell swap auction of $10 billion for a tenor of three years will be held on Feb. 4. Under this programme, the banks will sell dollars to the RBI for rupees and simultaneously agree to buy those dollars back later at a fixed forward rate. This effectively means the RBI borrowing rupees for a period while managing exchange rate risk and boosting market liquidity without permanently altering forex reserves.
Lastly, the central bank will purchase government securities for an aggregate amount of Rs 1 lakh crore via open market operations (OMO). It will be done in two tranches of Rs 50,000 crore each to be held on Feb. 5 and Feb. 12.
Detailed instructions for each operation shall be issued separately, the RBI said. “The Reserve Bank will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions,” the statement added.
Liquidity in India’s banking system has intermittently slipped into deficit in recent weeks despite the central bank’s bond purchases and FX swap operations, as per a Reuters report. Bankers told the news agency that cash conditions have come under increasing pressure from spot FX intervention.
Banking system liquidity slipped into a deficit of around Rs 6,000 crore on Wednesday, before marking a surplus of Rs 10,169 crore on Thursday. A lack of liquidity cripples credit demand in the economy.
A media report also said economists at domestic banks have urged the RBI to assure the markets it would conduct OMO purchases of at least Rs 3-5 lakh crore to help cool bond yields and quicken the transmission of policy rate cuts.
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