Daijiworld Media Network - Mumbai
Mumbai, Jun 23: The Reserve Bank of India (RBI) on Tuesday infused more than Rs 1.41 lakh crore into the banking system through a seven-day Variable Rate Repo (VRR) auction to ease short-term liquidity pressures.
According to data released by the central bank, the liquidity was injected at a cut-off rate and weighted average rate of 5.26 per cent.
The move came after the banking system slipped into a liquidity deficit of Rs 19,971.89 crore on June 22, compared to a surplus of Rs 30,685.11 crore recorded a day earlier.
Market analysts attributed the sudden tightening of liquidity primarily to large-scale outflows linked to Goods and Services Tax (GST) payments, which temporarily reduced the amount of cash available with banks.
The liquidity shortage also pushed up overnight borrowing costs in the money market. The weighted average call money rate rose to 5.43 per cent, about 18 basis points higher than the RBI's benchmark repo rate.
By injecting liquidity, the central bank aims to stabilise short-term interest rates and ensure adequate availability of funds within the financial system.
Economists said such interventions are necessary because a prolonged liquidity shortage can increase funding costs for banks and restrict the flow of credit to businesses and consumers, potentially affecting economic activity.
The RBI regularly uses a combination of monetary tools to address temporary cash shortages caused by factors such as GST payments, advance tax collections and seasonal spikes in credit demand.
One of the key instruments is the Variable Rate Repo auction, under which banks borrow money from the RBI by pledging eligible government securities for a specified period. These operations provide immediate support when liquidity conditions tighten.
For longer-term liquidity support, the central bank purchases government securities from the secondary market. Such open market operations permanently add cash into the banking system and help banks meet their statutory requirements, including maintaining the Cash Reserve Ratio (CRR).
The RBI also has the option of conducting dollar-rupee swap auctions, under which it purchases US dollars from commercial banks in exchange for rupees. This increases the supply of rupee liquidity and helps prevent sharp spikes in overnight interest rates.
The latest liquidity infusion underscores the RBI's continued efforts to maintain orderly market conditions and ensure that short-term funding pressures do not disrupt the broader financial system.