Stories
RBI Weighs Temporary Versus Permanent Liquidity Measures Ahead of Policy Outcome
- •The Reserve Bank of India may announce liquidity management tools alongside a rate hike at its upcoming October 7 policy outcome as banking system surplus liquidity stands at over Rs 5 lakh crore.
- •Market experts are divided on whether to use temporary tools like VRRR and FX swaps or permanent measures such as an increase in the Cash Reserve Ratio.
- •An unusual liquidity surplus was created following strong responses to the RBI concessional FCNR(B) swap facility, which brought in massive foreign-currency inflows.
- •Analysts expect much of the current excess liquidity to drain naturally in the coming months through currency leakage and other seasonal factors.
- •The last time the RBI revised the CRR upwards was in May 2022, when it was hiked by 50 basis points to absorb excess liquidity.
Key Questions Answered
The Reserve Bank of India is considering both temporary and permanent tools to manage surplus liquidity alongside a likely rate hike. Temporary options under discussion include variable rate reverse repo (VRRR) operations and sell-buy foreign exchange swaps, while more durable measures include an incremental cash reserve ratio (ICRR) or a 50-basis-point increase in the CRR.
The liquidity overhang was driven by a strong response to the RBI’s concessional FCNR(B) swap facility, through which banks mobilised $127.23 billion by August 31 as part of broader foreign-currency inflows totaling $136.38 billion. Because these deposits were exempt from CRR and SLR requirements, the subsequent dollar-rupee swaps released massive rupee liquidity into the banking system, pushing surpluses past Rs 11 lakh crore in early September.
System liquidity is expected to narrow naturally due to seasonal currency leakage as currency in circulation rises in the second half of the financial year. Additionally, a negative balance of payments and lagging deposit growth compared to credit growth are expected to help absorb the remaining surplus without requiring large permanent interventions.
