The Reserve Bank of India (RBI) on Tuesday infused short term liquidity of Rs 48,014 crore into the country’s banking system. The central bank has arranged this amount for the banking system through a seven-day ‘Variable Rate Repo’ (VRR) auction. Recently, there was a sharp decline in the surplus liquidity in the banking system due to heavy payment of advance tax, after which this step has been taken to balance the flow of cash in the economy.
What are the figures of Reserve Bank of India saying?
- According to the statement issued by RBI, this fund has been injected into the system at a cut-off rate and weighted average rate of 5.26 percent.
- The most important thing related to this auction was that despite the huge decline in liquidity, the amount taken by the banks remained much less than the limit fixed by the Central Bank.
- RBI had notified an amount of Rs 1.50 lakh crore for this VRR auction.
- In comparison, only Rs 48,014 crore was put into the system.
How does advance tax payment affect liquidity?
A major change has been seen in the liquidity situation in the banking system in the last few days. There has been a massive outflow of funds from banks due to payment of advance tax by corporates. There was huge excess liquidity of about Rs 2.08 lakh crore in the banking system as on March 15, before payment of advance tax. This surplus fell sharply to just Rs 75,483.63 crore on March 16, immediately after the tax outflow. To deal with this, short-term liquidity arrangements have been made.
What is VRR auction?
Under VRR (Variable Rate Repo) auction, the Reserve Bank of India auctions funds at variable interest rates for short periods. In this process commercial banks are allowed to bid (bid) for a certain amount as per their requirement, thereby meeting their immediate cash needs.
Will there be further liquidity problems?
According to market experts and current trends, the liquidity situation in the banking system is expected to become tighter in the coming days. The main reason for this is the payment of Goods and Services Tax (GST) at the end of this week. Due to GST outflow, more funds will go out of banks, which may increase cash pressure.
Effort to control overnight rates
The central bank has been continuously injecting liquidity into the banking system for the past few months to keep overnight rates under control. It is because of this continuous flow of liquidity that overnight rates remain well below the repo rate.
Overnight rates are the interest rates at which banks and financial institutions borrow or lend money among themselves for one day (24 hours or overnight). It is part of the short-term money market, used by banks to meet their daily liquidity needs. This rate is also known as the weighted average call rate or WACR in India. This rate serves as a benchmark for the central bank to implement monetary policy.
Additionally, the RBI has also infused a total of Rs 3.50 lakh crore of sustainable liquidity into the banking system through open market purchases (OMO) of government securities from January 2026, according to the report.