
The Reserve Bank of India (RBI) has planned to inject ₹2.50-lakh crore into the banking system through a 15-day variable rate repo (VRR) auction. This move is in response to the widening liquidity deficit, which has reached ₹3.34-lakh crore on January 23, compared to ₹1.29-lakh crore on January 1.
Reasons Behind Liquidity Concerns
Market experts note that significant cash balances held by the government with the RBI, stemming from GST inflows and advances, remain unutilized. This situation persists despite the central bank’s efforts to infuse liquidity through various channels, including VRR auctions, marginal standing facility, and long-term repo operations during the Covid-19 period.
Challenges Faced by Banks
Banks are currently grappling with liquidity pressure due to outflows in the previous month related to GST and advances tax payments. Moreover, the central government’s accumulated cash balances of around ₹2-lakh crore with the RBI contribute to the strain. Additionally, non-banking finance companies are offering higher returns through non-convertible debentures, creating competition for resources.
Market Dynamics and Investor Behavior
The buoyant equity markets have led retail investors to actively participate in initial public offers and mutual funds, diverting funds from traditional banking avenues. This scenario is compounded by the competition from non-banking finance companies offering attractive returns.
Expert Opinions and Suggestions
Gopal Tripathi, Head of Treasury and Capital Markets at Jana Small Finance, suggests that easing liquidity pressure requires the government to spend the accumulated balances with the RBI. Furthermore, absorbing dollars brought in by foreign portfolio investors could enhance liquidity.
RBI’s Perspective and Future Outlook
RBI Governor Shaktikanta Das, in a December 2023 statement, attributed the liquidity tightening to festive season spending, government cash balances, and RBI market operations. He expressed the expectation that government spending would alleviate liquidity conditions, and the RBI would remain adaptable in liquidity management.
India Ratings and Research Analysis
India Ratings and Research (Ind-Ra) suggests that if tight liquidity conditions persist, the RBI may need to infuse more durable liquidity into the banking system. On a net basis, the RBI has injected an average of ₹1.8-lakh crore between December 16, 2023, and January 14, 2024. Ind-Ra recommends a shift in the monetary policy stance from ‘withdrawal of accommodation’ to ‘neutral’ to maintain consistency of stance and action.