RBI allocates Rs.5,000 Crore to Standalone Primary Dealers to resolve Banking Liquidity Crisis

In light of the current shortage of funds in the banking system, the Reserve Bank of India (RBI) has taken steps to address the issue. This involves making an additional ₹5,000 crore available to Standalone Primary Dealers (SPDs) through the Standing Liquidity Facility. The effective date for this measure is January 31, 2024.
Decision Basis and Individual Limits
The RBI’s decision is rooted in an evaluation of the existing liquidity conditions and the evolving financial landscape. Individual SPDs will receive specific incremental limits, as communicated separately by the RBI. The interest rate applied to these transactions is the prevailing repo rate, set at 6.50 per cent.
Persistent Liquidity Deficit
Since September 2024, the banking system has been grappling with a liquidity deficit, amounting to approximately ₹2.68 lakh crore as of January 29, 2024.
Recent Repo Auction and Funding Demand
In the January 30, 2024, one-day variable rate repo auction, where Primary Dealers (PDs) participate alongside banks, the demand for funds was 2.76 times the notified amount of ₹25,000 crore. The RBI responded by allotting ₹25,008 crore to bidders at a weighted average rate of 6.74 per cent.
PDs’ Role and Privileges
Standalone Primary Dealers play a crucial role in the government securities market. They act as intermediaries between the RBI and investors, providing liquidity in the secondary market, and offering market-making services. PDs enjoy certain privileges, including exclusive participation rights in Treasury bill auctions, acting as counterparties in central bank open market operations, access to specific lines of credit, and permission to borrow specific issues from the central bank.
Historical Context
In March 2020, the RBI had temporarily increased the liquidity available to SPDs under the Standing Liquidity Facility from ₹2,800 crore to ₹10,000 crore. This measure aimed to facilitate year-end liquidity management by SPDs.