RBI injects Rs 1.41 lakh crore into banking system
Mumbai, June 23
The Reserve Bank of India on Tuesday pumped in over Rs 1.41 lakh crore transient liquidity into the banking system through a seven-day variable rate repo auction.
The funds were injected into the system at a cut-off rate and weighted average rate of 5.26 per cent, according to figures released by the RBI.
This was done after the liquidity in the banking system turned into a deficit of Rs 19,971.89 crore as on June 22, from a surplus of Rs 30,685.11 crore as on June 21.
Analysts said that the outflow of money from banks due to goods and services tax (GST) payments had led to the tightening of liquidity in the system.
The decline in liquidity had brought overnight money market rates under pressure, with the weighted average call money rate trading at 5.43 per cent, which is 0.18 per cent above the RBI's repo rate.
If banking liquidity tightens excessively due to events like Goods and Services Tax (GST) outflows, short-term money market rates (such as the weighted average call money rate) can push above the RBI's standard repo rate. By stepping in with liquidity injections, the RBI ensures that short-term funding pressures ease and credit continues to flow smoothly across the financial system without triggering economic slowdowns.
The RBI routinely injects transient and durable liquidity into the banking system to manage short-term deficits caused by tax outflows, advance tax payments, or seasonal credit demand. The central bank achieves this through various monetary tools and market operations.
The apex bank frequently conducts VRR auctions, including 3-day or 7-day tenors, to infuse substantial transient liquidity into the banking system. Banks pledge eligible government securities to borrow funds directly from the central bank, providing immediate relief when liquidity slips into deficit.
To inject durable liquidity into the system, the RBI purchases government securities from the secondary market. This permanently adds cash into the banking system, allowing banks to easily meet their Cash Reserve Ratio (CRR) requirements.
The central bank can execute USD-INR swap auctions. For example, the RBI might temporarily buy US dollars from commercial banks in exchange for rupees, directly increasing the rupee supply in the money market and preventing overnight interest rates from spiking.
— IANS
Reader Comments
I appreciate the explanation but I wonder if such frequent liquidity management is a sign of deeper issues in the banking system. Aren't we depending too much on RBI's short-term fixes? What about structural reforms to stabilize liquidity without constant central bank intervention? Also, the weighted average call money rate at 5.43% is quite high - that eventually affects our loan EMIs, no? 🤔
This is precisely why RBI is one of the most respected central banks globally. They understand that liquidity tightness during GST payments is a cyclical phenomenon, not a structural weakness. The 7-day VRR auction is perfectly timed to bridge the gap until the next round of government spending. As an investor, I feel reassured that the system has these safety nets.
Interesting approach. In the US, the Fed uses overnight repo operations to manage similar liquidity frictions during tax payment seasons. But seeing RBI inject ₹1.41 lakh crore in one go—that's roughly $17 billion!—shows the scale of India's economy. For a country with such GST complexities, this kind of fine-tuning is essential to prevent credit markets from freezing up.
While this is necessary, I feel the article could have discussed the impact on common people more. For instance, when call money rates spike above repo rate, it means banks' cost of short-term funds increases, which eventually trickles down to higher interest rates for personal loans and home loans. Yes, RBI is managing liquidity, but we also need to ensure these injections don't fuel inflation in the long run. 😊
Impressive operational capability at RBI
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