RBI Offers Large Liquidity Support To Prevent A Market Freeze
The Reserve Bank of India is continuing to supply large amounts of liquidity to the markets and the financial system as it tries to prevent a freeze in the credit markets, in the face of the coronavirus impact on the economy and financial system.
On Monday, the central bank said that it would offer Rs 1 lakh crore to banks via repo operations. Of the total amount, Rs 50,000 crore will be offered on Monday and another Rs 50,000 crore on Tuesday.
Results of the first auction showed that the RBI received bids worth Rs 31,585 crore. The bids were accepted at a cut-off rate of 5.16 percent. Through the auction, the RBI has provided funds for a 16-day period.
So far, the RBI has not eased rules for collateral. On Monday morning, Reuters reported that the central bank may accept corporate bonds as collateral. This would still need some work as the RBI would need to make changes to its existing rules to permit that.
Separately, the RBI announced that it is bringing forward planned bond purchases under its previously announced open market operation. The central bank will purchase Rs 15,000 crore in government bonds on March 24. A similar amount will be purchased on March 26 as well. The central bank had earlier planned to stagger these purchases over the course of the month.
The Reserve Bank is monitoring the evolving financial market conditions. The Reserve Bank will calibrate its operations to meet any need for additional liquidity support, if warranted, to ensure normal functioning of markets, promote staff welfare and preserve financial stability.RBI Statement
Addressing Market Risks
The latest measures to offer banks liquidity come against the backdrop of concerns that credit markets may freeze up. Over the last ten days, the central bank has tried to keep both the foreign exchange and local money markets liquid.
Measures announced so far include:
- $4 billion in forex swaps to provide dollar liquidity at a time when dollar availability is drying up. A $2 billion auction, conducted on Monday, saw limited off-take, which may suggest that the dollar shortage in the market is not severe. Bids worth $1.53 billion were received and bids worth only $650 million were accepted.
- Rs 40,000 crore in government bond purchases in March.
- Rs 1 lakh crore in overnight liquidity made available to banks via the repo window.
- Rs 1 lakh crore in long term repo operations where banks can raise funds for 1-3 years at the repo rate.
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