The purchase is part of the RBI's monetary policy announcement last week to inject Rs 1 lakh crore in the market via the purchase of government securities and another $5 billion equivalent via a foreign exchange swap facility.
The RBI has been selling US dollars in the market to prevent the rupee from going into a free fall, which has resulted in a lot of cash being sucked out of the banking system, which also tends to lead to an increase in interest rates in the market.
Reserve Bank Governor Sanjay Malhotra said on Friday that the RBI will ensure sufficient liquidity in the banking system without explicitly targeting surplus levels of around 1 per cent of net demand and time liabilities (NDTL).
"Monetary transmission is happening, and we will provide sufficient liquidity to support it," he said.
Malhotra said that current liquidity in the banking system sometimes exceeds 1 per cent of NDTL, ranging between 0.6 per cent and 1 per cent, occasionally going higher. "The exact number, whether 0.5, 0.6, or 1 per cent, should not matter. What is important is that banks have enough reserves to function smoothly," he added.
The central bank has announced liquidity measures through open market operations (OMOs) and forex buy-sell swaps. OMOs will involve the purchase of government securities worth Rs 1 trillion — in two tranches of Rs 50,000 crore each — on December 11 and December 18. Additionally, a USD/INR buy-sell swap of $5 billion for three years will be held on December 16.
Liquidity is primarily needed to maintain banking reserves. It fluctuates due to currency in circulation, when currency is issued, deposits decrease, or through foreign exchange operations, such as selling dollars, which draws deposits out of the banking system. Changes in reserve requirements due to higher deposits also affect liquidity.
About The Author
.jpg)
Comment List