RBI Faces Challenges in Balancing Liquidity as Banking Deficit Persists

The Reserve Bank of India (RBI) may inject an additional Rs 1 lakh crore into the banking system by March to address a significant liquidity deficit, according to an SBI report. Despite efforts like OMO and VRR auctions, persistent liquidity shortages stem from FPI outflows and rising credit demand.

The Reserve Bank of India is grappling with a notable liquidity shortage, expected to require an injection of Rs 1 lakh crore by March, according to a new report by State Bank of India researchers. As of February's end, the deficit was approximately Rs 1.6 lakh crore, painting a concerning picture for the financial system.

This liquidity crunch, described as one of the worst in a decade, has banks reeling from a consistent shortfall, driven by factors like substantial foreign portfolio investor outflows and the maturing of forward transactions. The SBI report predicts that Rs 1 trillion more will be necessary to stabilize the situation.

To counter the tight liquidity, the RBI has employed strategies such as variable rate repo auctions, open market operations, and dollar-rupee swaps. However, with rising credit demand and tax outflows exacerbating the situation, further measures may be required despite the recent reduction in the repo rate.

(With inputs from agencies.)