The Reserve Bank of India (RBI) has pumped in a massive Rs 43.21 lakh crore into the banking system since Sanjay Malhotra took charge as Governor in December. This bold move aims to tackle the tough liquidity situation that has gripped the financial sector over the past four months.
Malhotra stepped in at a critical time, just as liquidity was drying up due to tax outflows, reduced government spending, and heavy interventions in the forex market to support the rupee. To stabilize the system, the RBI deployed a range of tools to keep the banking sector well-oiled and functioning smoothly.
Key Measures Taken by the RBI:
- Rs 16.38 lakh crore was injected through normal Variable Rate Repo (VRR) auctions.
- Rs 25.79 lakh crore came from daily VRR auctions.
- Rs 60,020 crore was infused via Open Market Operation (OMO) purchases of government securities.
- Approximately Rs 45,000 crore was added through foreign exchange (USD/INR) Buy-Sell swap auctions.
Most of the liquidity support came from short-term VRR auctions, which typically mature the next day. This allows the RBI to stay agile, adjusting the liquidity supply as per the daily requirements of the banking system.
Why the Liquidity Crunch Happened: From December 16 to February 14, liquidity deficits fluctuated sharply, ranging from Rs 30,000 crore to as high as Rs 3 lakh crore. The situation worsened after December 16 due to over Rs 3 lakh crore in tax-related outflows. Despite the RBI cutting the cash reserve ratio (CRR) from 4.5% to 4% in December—releasing Rs 1.16 lakh crore into the system—liquidity remained tight because of the central bank’s massive $75 billion forex interventions to stabilize the rupee.
Impact on Borrowing Costs: The liquidity crunch led to a spike in overnight money market rates, with the weighted average call money rate hovering between 6.6% and 6.74%—higher than the RBI’s repo rate. This increase put pressure on borrowing costs for banks and businesses, particularly those seeking short-term funds for working capital.
RBI’s Assurances and Ongoing Support: In his post-policy press conference on February 7, Governor Malhotra assured that the RBI would continue to provide the necessary liquidity to ensure financial stability. The central bank’s proactive approach through VRR auctions, OMOs, and forex swaps has prevented overnight rates from spiraling out of control.
The RBI’s swift and decisive action under Governor Malhotra demonstrates its commitment to maintaining a stable and efficient financial system, ensuring that banks and businesses can continue to operate without disruption.
