RBI Injects ₹43 Lakh Crore Under Governor Malhotra to Ease Liquidity Crunch

The Reserve Bank of India (RBI) has infused approximately ₹43.21 lakh crore into the banking system since Governor Sanjay Malhotra took charge in December. This massive liquidity support was necessary to counter tightening financial conditions driven by tax outflows, limited government spending, and forex market interventions.

RBI’s Strategy to Manage Liquidity

The RBI deployed multiple tools to pump funds into the system. These included:

• Variable Rate Repo (VRR) Auctions: ₹16.38 lakh crore through regular VRRs and ₹25.79 lakh crore via daily VRRs.
• Open Market Operations (OMO): Government securities worth ₹60,020 crore were purchased.
• Forex Swaps: Around ₹45,000 crore was injected through USD/INR Buy-Sell swap auctions.

The central bank relied heavily on short-tenure VRR auctions, where funds were infused for a single day before being rolled over. This approach allowed flexibility in responding to evolving liquidity needs.

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Liquidity Deficit and Market Pressures

Liquidity conditions deteriorated sharply after Malhotra assumed office on December 11. The shortfall, which fluctuated between ₹30,000 crore and ₹3 lakh crore, was primarily caused by:

• Tax Outflows: More than ₹3 lakh crore drained from the system after December 16 due to tax payments.
• Cash Reserve Ratio (CRR) Cut: The RBI had lowered the CRR from 4.5% to 4% in December, releasing ₹1.16 lakh crore, but it wasn’t enough to offset liquidity pressures.
• Forex Market Interventions: The RBI spent over $75 billion to stabilize the rupee, further tightening liquidity.
   

As a result, overnight money market rates moved above the RBI’s repo rate, with the weighted average call money rate ranging between 6.6% and 6.74%. Higher overnight rates can increase borrowing costs for banks and corporates, impacting short-term funding and working capital management.

RBI’s Commitment to Liquidity Support

Despite the liquidity crunch, the RBI’s measures prevented extreme volatility in money market rates. Governor Sanjay Malhotra, in his first post-policy press conference on February 7, reassured that the central bank would inject liquidity as needed, both for overnight and long-term stability.

With liquidity conditions still tight, the RBI is likely to persist with its interventions to maintain financial stability while managing funding costs and market volatility