Overview
- RBI’s Response: The Reserve Bank of India (RBI) has announced a series of measures aimed at injecting liquidity into the banking system to address the liquidity deficit that has recently widened.
- Objective: These steps are designed to ease liquidity pressures in the banking system, ensuring smoother functioning of credit markets and financial stability.
Relevance : GS 3(Banking , Economy)
Key Measures Announced
Government Bond Purchases:
- The RBI will purchase 600 billion rupees ($6.96 billion) worth of government bonds in three tranches.
- This is expected to inject liquidity directly into the financial system, supporting the bond market and helping the government in managing its fiscal needs.
56-Day Variable Rate Repo Auction:
- On February 7, 2025, the RBI will conduct a 56-day variable rate repo auction worth 500 billion rupees.
- Repo auctions allow banks to borrow money from the RBI against government securities, helping to manage short-term liquidity needs.
USD/INR Swap Auction:
- The RBI will conduct a $5 billion USD/INR buy/sell swap auction on January 31, 2025, with a six-month tenor.
- This move is aimed at easing foreign exchange liquidity in the market and stabilizing the rupee-dollar exchange rate.
Context of the Measures
- Liquidity Deficit: The banking system’s liquidity deficit had reached a one-year peak in the previous fortnight, signaling tight liquidity conditions in the financial system.
- Impact of Measures: These actions are designed to ease short-term liquidity pressures, lower borrowing costs for banks, and support overall economic activity.
Expected Outcomes
- Stabilizing Market: By injecting liquidity, the RBI aims to stabilize the banking system, ensure adequate funding, and support market confidence.
- Currency Stability: The foreign exchange swap auction is also expected to help in maintaining stability in the rupee against major currencies, especially the US dollar.
