RBI To Stay 'Nimble And Flexible' In Managing Liquidity, Says Governor Das

The Reserve Bank of India will undertake an appropriate mix of instruments to ensure comfortable liquidity in the financial system, according to Governor Shaktikanta Das.

In the first bi-monthly monetary policy statement of 2024, Das said that the ongoing tightness in the system liquidity is due to "exogenous factors". As of Feb. 7, the liquidity in the banking system stood at a deficit of Rs 1.53 lakh crore, compared with Rs 2.7 lakh crore as of Jan. 26.

"We will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity so as to ensure that money market interest rates evolve in an orderly manner and financial stability is maintained," Das said.

Adjusted for government cash balances, potential liquidity in the banking system is still in surplus, Das said.

With government spending picking up and adding to the system level liquidity, the central bank undertook six fine-tuning variable rate reverse repo auctions during Feb 2-7 to absorb surplus liquidity, he added. Against a total notified amount of Rs 3.25 crore, the amount absorbed through these auctions was Rs 1.53 crore, according to RBI data.

On account of deficit liquidity and the scramble for short-term funding, the interest rates on short-term money market instruments have been fluctuating. However, long-term rates have remained stable, indicating better anchoring of inflation expectations, he said while presenting the policy statement.

In the credit market, the monetary transmission of the rate hikes remains incomplete, Das said.

This is evident from the 181-basis-point rise in the weighted average lending rate on fresh rupee loans during May 2022 to December 2023, when the liquidity was tight. On outstanding loans, the weighted average lending rate rose by 113 bps during this period.

The domestic term deposit rates on fresh deposits and outstanding deposits rose by 246 basis point and 180 basis point, respectively.

The central bank, which is withdrawing monetary accommodation to control inflation, has once again emphasised the need for better transmission of the 250 basis points of cumulative rate hikes between May 2022 and February 2023.

In December and January, the RBI conducted nine fine tuning variable rate repo auctions of 1 to 7 days maturity amounting to Rs 7.75 lakh crore, while two main VRR operations injected Rs 4.25 lakh crore into the system.

"RBI remains nimble and flexible in liquidty management through two-way finetuning via repo and reverse repo auctions," Das said in his monetary policy speech.

Further, the reversal of liquidity facilities through marginal standing facilities as well as statutory deposit facilities on weekends, announced in December monetary policy, have "facilitated better fund management by banks," the governor said.