As liquidity deficit widens, RBI to infuse ₹2.5lakh cr. liquidity via 15day VRR.

Syllabus: GS-III

Subject: Monetary policies and instruments

Topic: Broad/Overlap

Issue: Monetary Policy

Reasons for the high liquidity deficit in India’s banking system:

• Higher currency leakage during the festival season
• Limited government spending– high government balances with RBI.
• Advance tax payments of businesses reducing deposits in banks.
• Retail investors have been moving out of bank deposits because of bullish equity markets.

Related Concepts in News:

• Long Term repo operations:
  1. To inject long-term liquidity into the banking system.
  2. While repo rate is for overnight, long-term repo operations usually range from one to three years.

• Variable rate repo (VRR):
  1. Unlike a traditional fixed-rate repo where the interest rate is determined by RBI, a VRR involves an auction where banks submit bids specifying the interest rate they are willing to pay for short-term funds from the central bank.
• Marginal Standing facility(MSF):
  1. It is a window provided by the Reserve Bank of India (RBI) to scheduled commercial banks in India to avail additional overnight liquidity in case they face a severe shortage of funds.
  2. Interest rate is above repo-rate
• Standing deposit facility(SDF):
  1. It is a tool used by the RBI to absorb excess liquidity from the banking
  2. It allows overnight deposit facility for banks to park excess liquidity (money) and earn interest.
• Liquidity Crunch:
  1. A time when cash resources are in short supply and demand is high resulting in high interest rates