RBI to mop up surplus liquidity as it ‘rebalances’

14-day VRRR auctions to be mainstay

Updated - December 09, 2021 12:30 am IST

Published - December 08, 2021 10:45 pm IST - MUMBAI

The Reserve Bank of India seal on a gate outside the RBI headquarters in Mumbai. File

The Reserve Bank of India seal on a gate outside the RBI headquarters in Mumbai. File

The Reserve Bank (RBI) said it would continue to rebalance liquidity conditions in a non-disruptive manner while maintaining ‘adequate’ liquidity in the system.

It has proposed to enhance the 14-day variable rate reverse repo (VRRR) auction amounts on a fortnightly basis in the following manner: ₹6.5 lakh crore on December 17; and further to ₹7.5 lakh crore on December 31.

“Consequently, from January 2022 onwards, liquidity absorption will be undertaken mainly through the auction route,” RBI governor Shaktikanta Das said.

He pointed out that the RBI had been conducting fine-tuning operations from time to time to ‘manage unanticipated and one-off liquidity flows so that systemic liquidity conditions evolve in a balanced and evenly distributed manner’.

The central bank has also been conducting 28-day VRRR auctions.

Going forward, the main operation of 14-day VRRRs would continue to be complemented by longer term VRRRs, the size and maturities of which would be decided on the basis of continuous assessment of the evolving liquidity conditions, he said.

“The endeavour of the Reserve Bank is to put in place an effective liquidity management framework that is consistent with an economy emerging out of the pandemic and having a nascent but strengthening recovery,” Mr. Das said.

The Reserve Bank will also undertake Operation Twists (OT) and regular open-market operations (OMOs) as may be required for effective monetary transmission and anchoring of interest rate expectations in line with the evolving macroeconomic and financial conditions.

To rebalance the liquidity surplus, it has now been decided to provide one more option to banks to prepay the outstanding amount of funds availed under the Targeted Long-Term Repo Operations (TLTRO 1.0 and 2.0) announced on March 27 and April 17, 2020.

The banks had already prepaid ₹37,348 crore in November 2020, which constituted about one-third of ₹1,12,900 crore availed under the scheme, Mr. Das said.

The on-tap liquidity windows of ₹50,000 crore for ramping up COVID-related healthcare infrastructure and services and ₹15,000 crore for certain contact-intensive sectors would continue till their terminal date i.e., March 31, 2022, he said.

Given that the usage of the Marginal Standing Facility (MSF) window has been rare due to surplus liquidity conditions, it has been proposed to return to the normal dispensation under the MSF.

“Consequently, banks will be able to [tap] up to 2% of net demand and time liabilities (NDTL) instead of 3% for overnight borrowing under the MSF from January 1, 2022. This dispensation which was provided at the beginning of the pandemic had boosted market confidence at a crucial time,” the Governor said.

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