In a move to address tight liquidity conditions in the banking system, the Reserve Bank of India (RBI) on Monday announced a plan to inject an additional Rs 1.1 lakh crore into the economy. The central bank will use a combination of measures, including open market purchases of government securities, a variable rate repo auction, and a $5 billion dollar-rupee swap auction, to enhance liquidity.
This decision comes after a thorough review of the current financial and liquidity conditions. The RBI stated that it will closely monitor the situation and take further steps as needed to ensure smooth liquidity management.
Key Measures Announced by RBI
- Open Market Operations (OMOs):
The RBI will purchase government securities worth Rs 60,000 crore in three tranches of Rs 20,000 crore each. These purchases are scheduled for January 30, February 13, and February 20, 2025. - Variable Rate Repo Auction:
A 56-day variable rate repo auction for Rs 50,000 crore will be conducted on February 7. This will allow banks to borrow funds from the RBI by pledging government securities as collateral. - Dollar-Rupee Swap Auction:
On January 31, the RBI will conduct a $5 billion dollar-rupee swap auction with a six-month tenor. This move aims to infuse liquidity into the system while stabilizing the foreign exchange market.
Addressing Liquidity Deficit
The banking system has been facing a liquidity crunch, with a deficit of over Rs 3 lakh crore reported last week. Despite daily variable rate repo auctions, banks have struggled to meet their funding needs. The RBI’s latest measures are expected to ease this strain and ensure smoother functioning of the financial system.
Banks Raise Concerns Over New Liquidity Norms
Last week, the RBI held discussions with banks to assess the impact of its new liquidity coverage norms, which were introduced in a draft circular on July 25, 2024. Banks expressed concerns that these norms could pose challenges to credit flow and requested a deferment or alternative mechanisms to manage the changes.
The new norms require banks to set aside additional funds to manage risks, particularly in the face of sudden withdrawals. Key provisions include:
- Retail deposits with internet and mobile banking (IMB) facilities will have a run-off factor of 5%.
- Stable retail deposits enabled with IMB will have a run-off factor of 10%.
- Less stable deposits will have a run-off factor of 15%.
Banks will also need to increase their holdings of high-quality liquid assets (HQLAs), such as government securities, to meet these requirements. However, the RBI has clarified that banks cannot use their existing cash reserve ratios (CRR) to estimate HQLAs.
Impact on Banks and Credit Growth
Treasury officials estimate that banks may need to allocate over Rs 4 lakh crore to purchase government bonds to comply with the new norms. This could divert funds away from lending, potentially impacting credit growth in the economy.
Banks have approached the Finance Ministry, seeking a relaxation of the guidelines. They argue that the new norms could slow down credit expansion, which is crucial for economic growth.
RBI’s Focus on Resilience
The RBI emphasized that the banking sector has undergone rapid transformation in recent years, with increased use of technology enabling instant transfers and withdrawals. While this has improved convenience, it has also heightened risks, necessitating stronger liquidity management.
The central bank has reviewed the Liquidity Coverage Ratio (LCR) framework to ensure banks maintain sufficient high-quality liquid assets to handle sudden fund outflows. The RBI has rejected banks’ requests to include CRR in their HQLA calculations, stating that the new norms are essential to strengthen the resilience of the banking system.
A New Era Under Governor Sanjay Malhotra
This liquidity injection plan coincides with the tenure of the new RBI Governor, Sanjay Malhotra, who took over from Shaktikanta Das in December 2024. The move reflects the central bank’s proactive approach to addressing liquidity challenges and supporting economic stability.
Conclusion
The RBI’s decision to inject Rs 1.1 lakh crore into the banking system underscores its commitment to maintaining liquidity and ensuring the smooth functioning of financial markets. While the new liquidity norms aim to strengthen the banking sector, their implementation will require careful balancing to avoid any adverse impact on credit growth.
