RBI Announces Liquidity Infusion Measures

• The Reserve Bank of India (RBI) announced liquidity infusion measures to ease tight liquidity conditions in the banking system.
• RBI will conduct an open market purchase of Government Securities (G-Secs) worth ₹2 lakh crore to inject rupee liquidity.
• RBI will also conduct a USD/INR three-year Buy/Sell Swap auction of USD 10 billion to augment durable liquidity.

Open Market Operations (OMOs)

• Open Market Operations (OMOs) are market operations conducted by RBI through the sale or purchase of Government Securities in the open market.
• The objective of OMOs is to adjust rupee liquidity conditions in the financial system.
• In situations of excess liquidity, RBI sells G-Secs to absorb surplus rupees from the market.

USD/INR Buy/Sell Swap Mechanism

• In a USD/INR Buy/Sell Swap, the RBI purchases US dollars (USD) from banks in exchange for Indian Rupees (INR).
• RBI simultaneously enters into a forward agreement to sell the same amount of dollars back to banks at a future date.
• This mechanism injects rupee liquidity in the short to medium term without permanently altering forex reserves.
• Authorised Dealer (AD) Category-I banks are the eligible entities permitted to participate in the swap auction.

Need for Liquidity Infusion

• One reason for liquidity stress is RBI’s foreign exchange market intervention during sharp rupee depreciation.
• When RBI sells dollars from its foreign exchange reserves, banks pay rupees to RBI, which tightens systemic liquidity.
• Strong credit growth also reduces liquidity, as banks’ excess reserves decline when loans are extended.
• Additional pressures arise from advance tax outflows, which withdraw liquidity from the banking system.
• Liquidity conditions are further affected by foreign portfolio investors selling Indian equities, leading to capital outflows.

Other Liquidity Infusion Instruments

• Quantitative monetary policy tools include the Liquidity Adjustment Facility (Repo and Reverse Repo) used for day-to-day liquidity management.
• Other quantitative tools include the Cash Reserve Ratio (CRR), which mandates banks to hold reserves with RBI.
• The Statutory Liquidity Ratio (SLR) requires banks to hold a portion of deposits in liquid assets like G-Secs.
• The Bank Rate influences long-term interest rates by signaling RBI’s monetary stance.
• Qualitative tools include Credit Rationing, which limits the amount of credit extended by banks.
• Moral Suasion involves RBI persuading banks to follow desired policy directions without legal compulsion.
• Selective Credit Control (SCC) regulates credit to specific sectors to curb speculative activities.
• Margin Requirements are adjusted to control leverage and speculative borrowing in the economy.