RBI Announces Special Measures To Improve Liquidity Conditions

The Reserve Bank of India announced on Monday various special measures, such as the purchases of open market operations, longer tenure variable rate repo auctions and interventions in the foreign exchange market, in a bid to boost liquidity in the banking system.

Cumulatively, these measures will likely infuse about Rs 1.5 lakh crore of liquidity into the banking system.

In view of the current liquidity conditions, the central bank decided to conduct OMO purchase auctions of government bonds worth Rs 60,000 crore. These will be in three tranches of Rs 20,000 crore each and will be held on Jan. 30, Feb. 13 and Feb. 20 respectively, the RBI said in a release on Monday.

The second measure is the 56-day variable rate repo auction for an amount of Rs 50,000 crore, which will be held on Feb. 7. Lastly, the third measure is the dollar-rupee buy-sell swap auction of $5 billion for six months on Jan. 31.

This is over and top of the daily VRR auction announcement of Rs 50,000 crore that the RBI had declared on Jan. 15. As of Jan. 24, liquidity in the banking system was in the deficit mode of Rs 2.82 lakh crore as against Rs 1.04 lakh crore as on Jan 1.

The RBI will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions. It will upload detailed instructions for each operation separately.

"While the OMO purchase will infuse durable liquidity, the other measures will ease the liquidity deficit over the next 2-6 months," Nirmal Bang Institutional Equities said.

With expected moderation in dollar sales by RBI along with redemptions due in May and June, the liquidity deficit will eventually ease. However, an extended period of tight liquidity amid a cyclical downturn would have caused unwarranted damage, the brokerage said.

With liquidity measures already in place, Nirmal Bang continues to expect a rate cut in the next month's monetary policy meet.

On Jan. 14, NDTV Profit had exclusively reported that RBI may have to resort to other market intervention tools as VRR auctions were proving to be inefficient in easing liquidity conditions.

According to the report, market participants were expecting the central bank to start conducting OMO purchases and continue with buy-sell swaps in the currency market.

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

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