The Reserve Bank of India (RBI) remains committed to flexibility and two-sidedness in liquidity operations, but market participants must wean themselves away from the overhang of liquidity surpluses, according to Governor Shaktikanta Das.
Das observed that liquidity conditions were likely to improve due to several factors including moderation in currency circulation in the post-festival period, pick-up in government expenditure in the last few months of the financial year, and higher forex inflows from returning portfolio investors.
“Tax outflows and currency demand do produce transient episodes of tight liquidity, but a holistic view needs to be taken. I reiterate that the Reserve Bank remains nimble and flexible in its liquidity management operations to meet the requirements of the productive sectors of the economy,” the RBI Governor said.
Therefore, although the Reserve Bank remains in absorption mode, it is ready to conduct LAF (liquidity adjustment facility) operations to inject liquidity as needed through its main operations.
“In doing so, however, we will look for a durable sign of a turn in the liquidity cycle when banks draw down a large part of their standing deposit facility (SDF) and variable rate reverse repo (VRRR) balances,” Das said.
The RBI Governor noted that, overall, system liquidity remains surplus. During October to November, the average total absorption under LAF was ₹1.4 lakh crore, down from ₹2.2 lakh crore during August to September.
Meanwhile, as part of the RBI’s gradual move towards normal liquidity operations, it has decided to restore market hours — from 9 am to 5 pm — for the call/notice/term money, commercial paper, certificates of deposit, and repo in corporate bond segments of the money market as well as rupee interest rate derivatives.