The Reserve Bank of India (RBI) is set to increase its liquidity infusion into the banking system through the 7-day variable rate repo (VRR) auction on December 22. The central bank, responding to a liquidity deficit near an 8-year high of ₹2.27-lakh crore as of December 20, has raised the offered amount to ₹1.75-lakh crore, up from ₹1-lakh crore in the previous week. This move aims to assist banks in overcoming liquidity challenges.
- Liquidity Deficit Concerns: The banking system faced an unprecedented liquidity deficit, prompting the RBI to enhance its support through the VRR auction.
- Previous Auction Results: The central bank had injected ₹1,00,006 crore in the banking system on December 15, and this amount is set to be returned by banks on December 21.
- High Bidding Interest: The weighted average rate in the overnight segment remains slightly above 6.75%, indicating potential high bidding interest in the upcoming VRR auction.
- Certificate of Deposits Issuance: Banks are resorting to increased issuance of certificate of deposits to manage their liquidity positions amid the tight liquidity scenario.
- Past Auction Outcomes: In the previous VRR auction, banks placed bids amounting to ₹2,73,354 crore against the notified amount of ₹1-lakh crore, underscoring the liquidity tightness in the banking system.
RBI Governor Shaktikanta Das highlighted the liquidity challenges, noting that the system faced deficit conditions for the first time since September 2023. The central bank is closely monitoring liquidity conditions, with recent easing attributed to increased government spending and a balanced liquidity distribution among market participants. Governor Das emphasized the RBI’s commitment to nimble liquidity management in the evolving economic landscape.
Questions Related to Exams
Q: Why is the RBI increasing the amount in the 7-day VRR auction on Dec 22?
A: To address an 8-year-high liquidity deficit of ₹2.27-lakh crore in the banking system.
Q: What is the offered amount in the upcoming VRR auction?
A: The RBI has raised it to ₹1.75-lakh crore, up from ₹1-lakh crore last week.
Q: Why is there high bidding interest expected in the VRR auction?
A: The overnight segment’s weighted average rate remains slightly above 6.75%, signaling potential high interest.
Q: What is the current liquidity scenario in the banking system?
A: Banks face liquidity tightness, as seen in the ₹2,73,354 crore bids at the previous VRR auction against the notified ₹1-lakh crore.