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

 

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