Mumbai: The Reserve Bank of India (RBI) on Monday announced that it would inject another Rs 110,000 crore liquidity into the banking system through open market purchase auctions of Government securities and carrying out a variable rate repo auction. Besides, a $5 billion dollar-rupee swap auction would also be held to provide more liquidity in the system.
The RBI said that the steps were being taken after a review of the current liquidity and financial conditions.
The open market operations purchase auctions of Government of India securities for an aggregate amount of Rs 60,000 crore will be done in three tranches of Rs 20,000 crore each to be held on January 30, February 13, and February 20, 2025, the RBI said.
A 56-day Variable Rate Repo (VRR) auction for a notified amount of Rs 50,000 crore will be held on February 7, while the USD/INR Buy/Sell Swap auction of USD 5 billion for a tenor of six months will be held on January 31, 2025, according to the RBI statement.
Detailed instructions for each operation will be issued separately, the statement added.
The Reserve Bank also said that it will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions.
Reserve Bank of India got in touch with banks last week to understand the impact of its new liquidity coverage norms following concerns that the move would adversely impact the flow of credit in the economy.
Banks have provided some feedback, asked for deferment of the norms and alternative mechanisms to cope with the likely hit from these norms.
The move has been initiated at a time when Sanjay Malhotra has just taken over as the new RBI Governor succeeding Shaktikanta Das, who completed an extended tenure as head of the central bank in December.
Liquidity has already turned tight as the banking system was facing a deficit of over Rs 3 lakh crore last week despite the daily variable repo rate auctions that the RBI started carrying out last week.
The RBI had on July 25 issued a draft circular which will require banks to set aside more funds to cover their risks from April 1 this year.
The RBI said banking has undergone rapid transformation in recent years. While increased usage of technology has facilitated the ability to make instantaneous bank transfers and withdrawals, it has also led to a concomitant increase in risks, requiring proactive management. It has reviewed the Liquidity Coverage Ratio (LCR) framework to increase the resilience of banks.
Banks have been directed to assign an additional 5 per cent funds as a run-off factor for retail deposits which are enabled with internet and mobile banking facilities (IMB). Stable retail deposits enabled with IMB shall have 10 per cent run-off factor and less stable deposits enabled with IMB shall have 15 per cent run-off factor.
LCR requires banks to maintain sufficient high-quality liquid assets (HQLAs), comprising mainly government securities, to manage a potential liquidity crunch due to any sudden withdrawal of funds. RBI has rejected the request of banks to include their existing cash reserve ratios to estimate HQLAs.
According to treasury officials of banks, this would in effect mean over Rs 4 lakh crore would have to be diverted from banks to buy government bonds instead of extending credit to corporates and individuals to demand in the economy.
Banks have also sounded the finance ministry on the need for easing the stringent RBI guidelines which are likely to hit credit growth.
(IANS)
