RBI Monetary Policy: Shrinkage in surplus liquidity between April and May

The average daily absorptions under the liquidity adjustment facility (LAF) between April and May, which were ₹1.7 lakh crore, showed less surplus liquidity than the ₹2.9 lakh crore throughout the entire fiscal year 2022–23. Shaktikanta Das, governor of the Reserve Bank of India (RBI), noted that among other factors, the maturing of targeted longer-term refinancing operations (TLTROs) contributed to the reduction in excess liquidity during the months of April and May.

Das said that the seasonal spike in the amount of money in circulation and the accumulation of government cash balances during this time also helped to moderate excess liquidity.

However, from the third week of May, the increase in government spending and decrease in the amount of money in circulation have increased the liquidity of the system. The RBI's market activities and the deposit of ₹2,000 banknotes in banks have further increased this.

The prevalence of surplus liquidity and higher use of the marginal standing facility (MSF) by some banks point to unequal distribution of liquidity within the banking sector. To solve the situation, the RBI held two 14-day VRR auctions earlier in February and March 2023 totaling ₹50,000 crore each.

The Reserve Bank conducted a 14-day variable rate reverse repo (VRRR) auction on June 2 for ₹2.0 lakh crore; a 4-day VRRR auction for ₹1.0 lakh crore on June 5; a 3-day VRRR auction for ₹75,000 crore on June 6; and a 2-day VRRR auction for ₹75,000 crore on June 7 in an effort to move quickly with its liquidity action. In these auctions, there has been a cautious response.

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The Reserve Bank will continue to be nimble in managing liquidity while making sure that there are enough resources available to meet the productive needs of the economy. Additionally, the RBI will see to it that the government's programme for market borrowing is carried out in a timely manner.

Money market rates firmed up occasionally even beyond the repo rate before dropping from May 18 to sub-repo rate levels, reflecting the moderation in system liquidity and its skewed distribution. However, long-term interest rates have largely held steady. Due to this, term spreads have recently been sharply compressed. The relative stability of long-term yields indicates well for the economy and points to a successful market-based anchoring of long-term inflation expectations, said Das.

The RBI MPC on Thursday has decided to keep the repo rate unchanged at 6.5%, RBI governor Shaktikanta Das said.

For the fiscal 2023–24, the second bimonthly monetary policy meeting took place over a three-day period beginning on Tuesday, June 6, and ending on Thursday, June 8.

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