Liquidity in the banking system gradually tightening
Liquidity in the banking system is gradually tightening in the run-up to the mid-month outflows on account GST and advance tax payments.
This is underscored by the demand for funds at the RBI’s variable rate repo (VRR) auction window. The central bank temporarily provides liquidity to banks through this route.
The central bank received bids aggregating ₹62,877 crore at the two-day VRR auction conducted by the RBI against the notified amount of ₹25,000 crore. It accepted bids aggregating ₹25,005 crore at a weighted average rate of 6.65 per cent.
At the previous VRR (overnight) auction conducted on December 9, RBI received bids aggregating ₹40,630 crore against the notified amount of ₹50,000 crore. It accepted bids aggregating ₹40,630 crore at a weighted average rate of 6.53 per cent.
In his last monetary policy statement on December 6th, then RBI Governor Shaktikanta Das observed that even as liquidity in the banking system remains adequate, systemic liquidity may tighten in the coming months due to tax outflows, increase in currency in circulation and volatility in capital flows.
“To ease the potential liquidity stress, it has now been decided to reduce the cash reserve ratio (CRR) of all banks to 4 per cent of net demand and time liabilities (NDTL) in two equal tranches of 25 bps each with effect from the fortnight beginning December 14, 2024 and December 28, 2024.
“This will restore the CRR to 4 per cent of NDTL, which was prevailing before the commencement of the policy tightening cycle in April 2022,” Das said.
He emphasised that this reduction in the CRR is consistent with the neutral policy stance and would release primary liquidity of about ₹1.16 lakh crore to the banking system.
Das noted that going forward, the Reserve Bank will continue to be nimble and proactive in its liquidity management operations to ensure that money market interest rates evolve in an orderly manner and the productive requirements of the economy are met.