RBI's Liquidity Management Toolkit May Need A Refresh — Profit Exclusive

Market participants are expecting the central bank to start conducting open market operations, while continuing with buy-sell swaps in the currency market.

This has come despite the RBI's persistent VRR auctions. Banking system liquidity remains in the deficit of Rs 2.2 lakh crore as of Jan. 12, reflecting the ineffectiveness of this tool, a senior bank treasury official said.

"For longer tenor liquidity provision, buy-sell swaps or open market operations give more flexibility to banks, compared to VRR," said Neeraj Gambhir, group executive of treasury, markets and wholesale banking products of Axis Bank.

"Banks can reverse these transactions in the market more flexibly if the liquidity conditions change," Gambhir said.

On Monday, the RBI conducted a VRR auction, with a notified amount of Rs 50,000 crore and received total bids worth Rs 86,155 crore.

Last week, RBI conducted the biggest VRR auction in nearly a year with a notified amount of Rs 2.25 lakh crore. Banks had submitted bids worth Rs 2.77 lakh crore, leading the RBI to conduct a second VRR auction worth Rs 50,000 crore. The second auction also received strong response as banks placed bids of around Rs 75,000 crore.

RBI usually conducts VRR auctions to inject liquidity in the banking system when it turns into deficit mode.

Buy or sell swaps in the FX market for three or six months can help provide more longer tenure liquidity in the system and OMOs can also be crucial.

Last week, RBI had announced that the government would buy back five gilts maturing in the financial year ending March 2026 worth Rs 30,000 crore.

Market participants are expecting the central bank to start conducting open market operations, while continuing with buy-sell swaps in the currency market.

This has come despite the RBI's persistent VRR auctions. Banking system liquidity remains in the deficit of Rs 2.2 lakh crore as of Jan. 12, reflecting the ineffectiveness of this tool, a senior bank treasury official said.

"For longer tenor liquidity provision, buy-sell swaps or open market operations give more flexibility to banks, compared to VRR," said Neeraj Gambhir, group executive of treasury, markets and wholesale banking products of Axis Bank.

"Banks can reverse these transactions in the market more flexibly if the liquidity conditions change," Gambhir said.

On Monday, the RBI conducted a VRR auction, with a notified amount of Rs 50,000 crore and received total bids worth Rs 86,155 crore.

Last week, RBI conducted the biggest VRR auction in nearly a year with a notified amount of Rs 2.25 lakh crore. Banks had submitted bids worth Rs 2.77 lakh crore, leading the RBI to conduct a second VRR auction worth Rs 50,000 crore. The second auction also received strong response as banks placed bids of around Rs 75,000 crore.

RBI usually conducts VRR auctions to inject liquidity in the banking system when it turns into deficit mode.

Buy or sell swaps in the FX market for three or six months can help provide more longer tenure liquidity in the system and OMOs can also be crucial.

Last week, RBI had announced that the government would buy back five gilts maturing in the financial year ending March 2026 worth Rs 30,000 crore.

Increasing foreign exchange intervention by the RBI has largely been the reason behind this decrease in overall banking liquidity. Direct interventions require the RBI to sell dollars to the system, while rupee liquidity is sucked out.

On Monday, the Indian rupee declined past the psychological crucial level of 86 against dollar after better-than-expected US jobs data led to an expectation that the Federal Reserve would go easy on rate cuts.

While RBI did conduct a 50 basis point cut in cash reserve ratio to partly offset it, the size of intervention has been much higher than what could have been addressed by the CRR, said those apprised of the situation.

Another CRR cut at the upcoming monetary policy meet in February cannot be ruled out, another senior bank treasury official said, speaking on conditions of anonymity.

Since the end of September last year, liquidity in surplus has dropped Rs 4.6 lakh crore to Rs 40,000 crore. The outlook on liquidity remains poor, with most market participants expecting it to remain in deficit till March.

"The RBI continues its operations and has recently been conducing Variable Rate Repos to inject liquidity. However, in our view, these are falling short of providing for the liquidity needs of the market," Nomura Research said in its report last week.

Majorly, VRR auctions by the RBI were used under the previous Governor Shaktikanta Das' term. However, with the Indian rupee depreciating at a faster pace given the change at RBI's helm, policies to manage liquidity conditions are also likely to undergo changes, another person said.

New Governor Sanjay Malhotra, who took charge last month, and the replacement of Deputy Governor Michael Patra whose term ends this week, has also kept traders on toes for a change in strategy.