The Reserve Bank of India’s efforts to rebalance the quantum of surplus liquidity in the banking system by shifting the excess funds from the overnight fixed-rate reverse window to variable rate reverse repo facilities has evolved satisfactorily, the central bank said on Thursday.
“As stated in Governor’s statement of December 8, 2021, the Reserve Bank has been rebalancing the surplus liquidity in the system by shifting it out of the fixed-rate overnight reverse repo window into the variable rate reverse repo (VRRR) auctions of longer maturity. Overall, this rebalancing has proceeded on a pre-announced glide path and has evolved satisfactorily,” the RBI said through a press release on its website.
The central bank said that it would carry on rebalancing liquidity conditions in a non-disruptive manner while ensuring sufficient liquidity to meet the needs of the productive sectors of the economy. “With larger than anticipated collections under the goods and services tax (GST), system liquidity has tightened in this week,” it said.
After a long hiatus, the RBI announced and conducted a variable rate repo auction as overnight money market rates had hardened this week due to larger-than-anticipated collections under the goods and services tax.
The overnight variable rate repo auction, which had a notified amount of Rs 50,000 crore, drew bids worth Rs 65,700 crore, with the cutoff rate being set at 4.06 per cent. The weighted average rate was 4.10 per cent.
In a repo operation, the central bank lends out funds to banks in exchange for government securities.
In the December monetary policy review, the central bank had said that it aims to make the 14-day variable rate reverse repo auction, the primary route for liquidity absorption.
Following large-scale liquidity infusions by the central bank amid the coronavirus pandemic, liquidity in the banking system has swollen to record highs, with the surplus estimated at around Rs 7 lakh crores last week.
The central bank’s efforts to nudge banks to park funds at longer-tenure variable rate reverse repo auctions have not always met with success though, with some such auctions seeing poor participation as banks were averse to lending out cash for longer periods.
Some market participants have also questioned the efficacy of the step, given that a significant portion of the liquidity surplus rests on the books of mutual funds, which are not permitted access to the RBI’s reverse repo window.
Managing liquidity conditions in the banking system is a tricky job for the RBI at the moment as inflation in India remains well above the central bank’s own targets, while central banks in advanced economies are progressively moving towards tighter monetary policies.
Even as economic growth still requires much support amid the COVID pandemic, it seems a foregone conclusion that the RBI will have to proactively tackle the liquidity surplus in the banking system and consider raising interest rates to be in sync with both global and domestic inflationary developments.