Central bank readies liquidity boost of Rs 1.25 lakh crore, Pg19

Key Highlights:

• The Reserve Bank of India (RBI) will inject Rs 1.25 lakh crore into the financial system.
• Measures include a 90-day Variable Rate Repo (VRR) of Rs 25,000 crore on January 30.
• A three-year dollar-rupee buy/sell swap auction of $10 billion is scheduled for February 4.
• Government securities worth Rs 1 lakh crore will be purchased through Open Market Operations (OMOs) in two tranches on February 5 and February 12.

Detailed Insights:

• Liquidity in the banking system has decreased from Rs 1.78 lakh crore in November to Rs 57,121 crore in January.
• Continuous intervention in the forex market due to a weaker rupee has been draining liquidity.
• Increased credit demand and slow deposit growth have strained the banking system's liquidity.
• The RBI has injected Rs 4.5 lakh crore into the system in December and January through OMOs and forex swaps.
• Bond purchases by the RBI in the current financial year amount to Rs 5.2 lakh crore.
• These measures aim to ease liquidity pressure, especially with upcoming advance tax outflows in March.

Key Concepts Involved:

• Variable Rate Repo (VRR): A tool used by the RBI to inject liquidity into the banking system for a specific period at a variable interest rate.
• Open Market Operations (OMOs): The buying and selling of government securities by the RBI to regulate the money supply in the economy.
• Dollar-Rupee Buy/Sell Swap: An agreement where the RBI buys dollars from banks and simultaneously agrees to sell them back at a predetermined future date and price, managing liquidity and exchange rates.