How RBI is managing liquidity amid pressure from banks?, BFSI News, ET BFSI

The Reserve Financial institution of India (RBI) has been actively addressing a persistent liquidity crunch within the banking system, which has strained credit score availability and pushed short-term rates of interest greater. Over the previous two months, the central financial institution has injected Rs 15.5 lakh crore by means of varied measures to ease liquidity stress and assist financial development. Regardless of these efforts, liquidity stays tight on account of a number of components, together with foreign exchange market interventions, tax outflows, and gradual deposit development. This explainer breaks down the present liquidity scenario, the explanations behind the deficit, RBI’s response, and the potential affect on the economy.

What is going on with liquidity within the banking system?

The Reserve Financial institution of India (RBI) has infused Rs 15.5 lakh crore into the banking system over the previous two months by means of sturdy and transient liquidity measures to deal with the continued liquidity deficit and assist credit score development. Nonetheless, liquidity stays tight on account of components such because the central financial institution’s overseas trade market interventions, authorities tax circulate dynamics, foreign money leakages, and overseas portfolio investor (FPI) outflows.

How has RBI addressed the liquidity deficit?

RBI injected about Rs 5.5 lakh crore of sturdy liquidity in Q4FY25 by means of open market operation (OMO) purchases, longer-duration variable repo price (VRR) auctions, and foreign exchange (USD/INR) purchase/promote swaps. Moreover, between February 16 and March 17, 2025, the central financial institution carried out 22 fine-tuning VRR operations and two essential VRR operations, injecting Rs 9.68 lakh crore into the system with maturities starting from 1 to eight days.

What are the important thing measures RBI has taken?

OMO purchases contain RBI shopping for authorities securities (G-Secs) from banks to offer sturdy liquidity. VRR auctions permit banks to put G-Secs as collateral and draw short-term liquidity. Foreign exchange purchase/promote swaps contain banks promoting {dollars} to the RBI initially and repurchasing them later by returning rupee funds together with the swap premium after the swap tenor. To handle transient liquidity tightness, RBI has been conducting every day VRR auctions since January 16, 2025, permitting standalone main sellers (SPDs) to take part and deal with short-term liquidity mismatches.

Has the liquidity deficit improved?

RBI’s measures have moderated the liquidity deficit, with the typical every day web injection beneath the liquidity adjustment facility (LAF) decreasing to Rs 1.41 lakh crore between February 16 and March 13, 2025, from Rs 1.92 lakh crore throughout January 16 to February 15, 2025. The liquidity deficit, which peaked at Rs 3.15 lakh crore on January 23, eased to Rs 2.26 lakh crore by March 18, 2025. Regardless of prevailing liquidity tightness, banks’ placements of surplus funds beneath the standing deposit facility (SDF) averaged Rs 1.15 lakh crore between February 16 and March 13, greater than Rs 0.85 lakh crore within the earlier month.

Why is liquidity so essential?

Liquidity is important for the financial system, making certain that banks come up with the money for to lend and protecting rates of interest beneath management. Satisfactory liquidity boosts credit score development and provides corporates the arrogance to spend on capital expenditure, making a virtuous cycle of financial development.

What’s the present scenario with liquidity?

Indian banks are going through a liquidity crunch, which has constrained their skill to assist development. On January 23, 2025, the liquidity deficit peaked at Rs 3.15 lakh crore, marking a 15-year excessive. As of February 27, 2025, the deficit had eased to round Rs 1.81 lakh crore, however liquidity stays tight.

What’s a liquidity deficit?

In banking phrases, liquidity refers back to the availability of money and cash-equivalents that banks use to lend, make investments, and meet obligations. A liquidity deficit happens when banks don’t have sufficient free money to satisfy short-term wants, leading to a scenario the place they’ve extra payments to pay than cash readily available.

Do banks not come up with the money for?

Not precisely. To bridge this hole, banks borrow from the RBI utilizing varied liquidity instruments. These measures assist banks meet short-term funding wants, however extended liquidity stress can enhance borrowing prices and affect credit score availability within the financial system.

What brought about the latest liquidity crunch?

A number of components have contributed to the liquidity crunch. Advance tax outflows in December 2024 noticed firms pay over Rs 3 lakh crore, quickly exiting the banking system and decreasing obtainable liquidity. Festive season withdrawals throughout Diwali, Christmas, and New Yr elevated money demand. RBI’s foreign exchange market interventions between October 2024 and January 2025 absorbed rupees from the system to stabilise the rupee, decreasing liquidity. Sluggish deposit development and better rates of interest have additional exacerbated liquidity stress.

What are the results of liquidity stress?

Liquidity stress tightens monetary circumstances, making borrowing costlier and slowing financial momentum. Rising borrowing prices result in greater short-term rates of interest, squeezing financial institution earnings. This impacts banks’ skill to lend and reduces consumption, weakening general financial momentum. Non-banking monetary firms (NBFCs), which rely closely on borrowing, face greater charges, limiting their skill to finance key sectors like housing and MSMEs.

How has RBI responded to the liquidity crunch?

The RBI has taken a number of measures to deal with the liquidity crunch. A 50 foundation level reduce within the Cash Reserve Ratio (CRR) in December 2024 injected roughly Rs 1.2 lakh crore into the system. OMO purchases in January and February 2025 added Rs 60,000 crore of liquidity. The introduction of a 56-day VRR value Rs 50,000 crore in February 2025 offered longer-term liquidity assist. A 25 foundation level repo price reduce in February 2025 diminished borrowing prices, enhancing money circulate and boosting credit score development. Foreign exchange purchase/promote swaps in January and February 2025 helped handle rupee stability and regulate liquidity.

How do these measures have an effect on the market?

Liquidity stress has shaken market confidence, fuelling uncertainty and investor warning. Banking shares have been beneath strain on account of tighter monetary circumstances and better borrowing prices.

What lies forward?

The RBI continues to observe liquidity circumstances and has extra instruments at its disposal, together with repo price changes, relaxed marginal standing facility (MSF) norms, and adjustments within the standing deposit facility (SDF) price. Accelerating authorities spending also can inject contemporary liquidity, serving to banks handle liquidity pressures and preserve the financial system on observe.