Mumbai: The recent move by the Reserve Bank of India to inject funds into the banking system, despite a surplus of liquidity, shows the central bank’s strategic approach to prevent an increase in banks’ cost of funds. Analysts believe this decision was made to counteract recent overseas outflows from local capital markets and cash withdrawals during festivals.
The RBI’s decision to provide short-term liquidity on Friday follows its shift in monetary policy stance from withdrawal of accommodation to a more neutral stance. This change signals the central bank’s willingness to tolerate easier liquidity conditions, providing flexibility for rates to be adjusted accordingly.
On Friday, the RBI injected Rs 25,000 crore through a Variable Rate Repo (VRR) auction, the first operation of its kind since September 24. The auction received bids totaling Rs 48,700 crore from banks, indicating a strong demand for funds from lenders.
“This seems like a minor adjustment as there is still a surplus of liquidity as of October 24. The recent pressure in the currency market and outflows due to GST payments may have prompted this move,” said Vivek Kumar, an economist at Quanteco Research. He also mentioned the cash-heavy demand during the Diwali festival period as a contributing factor.
With foreign portfolio investors withdrawing a significant amount from Indian equity markets in October, the rupee has faced downward pressure. The RBI’s interventions, including dollar sales, have helped stabilize the currency exchange rate and prevent excessive volatility.
India’s foreign exchange reserves have experienced a decline in recent weeks, falling to $688.26 billion. This trend, along with dollar sales by the RBI, has reduced liquidity in the banking system. The weighted average call rate (WACR) increased to 6.75% on Wednesday, reflecting the impact of reduced cash surplus on funding costs.
In conclusion, the RBI’s decision to inject funds into the banking system aims to maintain stability in the financial markets amidst external pressures and seasonal cash flows. This move demonstrates the central bank’s proactive approach to managing liquidity and ensuring the smooth functioning of the banking system.
