MUMBAI: The Reserve Bank has injected a whopping Rs 45 trillion into the banking system since the December 6 monetary policy review when it slashed the cash reserve ratio by 50 bps to 4%, releasing Rs 1.16 trillion into the system. Of the total, more than Rs 43 trillion of fresh liquidity has flown into the system between December 11 when the new governor Sanjay Malhotra assumed office and up to February 18, when the central bank pumped in another Rs 1 trillion through the variable repo auction, which it launched on a daily basis from January 15.
In fact, the Malhotra’s term began with two serious challenges—a bleeding rupee, which has seen its worst days under him, having sniffed at 88 to the dollar last week, and very tight liquidity conditions, which has been dogging the system since November.
The liquidity remains tight for banks as the money borrowed through VRR auctions have to be returned on an everyday basis to the RBI—which means they borrowed today through the VRR has to be returned to the RBI by tomorrow, which effectively means RBI is just managing it on a daily basis. And the main culprit is the central government who is holding on to large sums of money as its capex push has not been happening at planned.
For instance, as of January 20, government's cash balance with the RBI was Rs 75,000 crore, significantly higher that around Rs 4,000 crore on January 15, 2025.
It can be noted that liquidity deficit swung from Rs 30,000 crore to Rs 3 trillion between December 16 and February 14 due to tax outflows, RBI intervention in the forex market and limited spending by government, show the central bank data.
The Mint Road has infused these vast sums of money through a slew of options such as daily VRR (variable rate repo) auctions of Rs 26.79 trillion till February 18, the normal variable rate repo (VRR) auctions worth Rs 16.38 trillion, open market operations in government securities worth Rs 60,020 crore and dollar-rupee buy-sell swap auction of around Rs 45,000 crore, show the RBI data.
As liquidity conditions worsened in mid-January ahead of GST payouts, the RBI announced daily repo auction under the VRR route, which has become the most preferred rout for the central bank to infuse money into the banking system as VRR typically mature the next day and allow the central bank to conduct another auction with higher amount.
Malhotra assumed office just when liquidity started dipping due to advance tax and GST outflows, limited spending by the government and heavy intervention by the central bank in the forex market to support the rupee.
Since December 11, the rupee has lost more than 3.5% and had the shortest run-rate of 11 days to fall from 87 to 87.95 last week. In the last one week alone, the RBI reportedly sold close to $12 billion from the reserves to prop the rupee which had fell to 87.95 on February 10.
System level liquidity deficit has soared from Rs 30,000 crore on certain days to as high as Rs 3 trillion between December 16 and February 14, according to the RBI data. And more money will flow in to the banks next week as RBI will be injecting $16 billion to cover for tax outflows.
The cash shortfall widened after December 16 due to outflows of over Rs 3 trillion in advance tax payouts. The system was so starved of money that despite the RBI reducing cash reserve ratio from 4.5 to 4 percent on December 6, effective December 15 in anticipation of tight liquidity, releasing Rs 1.16 trillion, it wasn't enough as RBI has been selling heavily in the forex market to the tune of $90 billion since December, to stabilise the bleeding rupee.
When liquidity gets tight the first impact is on the overnight money market that has been trading above the repo rate for quite some time with weighted average call money rates traded in the 6.6-6.74% range and still remains slightly above the repo. This has the cost of borrowing for corporates and banks going up, especially their short-term fund cost like working capital loans which come in at over 11% now.
The liquidity-infusion measures are in line with the assurance given by Malhotra after during the first post- policy press conference on February 7.