RBI ready to infuse additional cash via LAF operations if needed, expects liquidity to improve ahead

The Reserve Bank of India (RBI) on Wednesday said overall system liquidity remains in surplus. In the December policy, the central bank revealed that average daily absorption under the liquidity adjustment facility (LAF) stood at ₹1.4 lakh crore from October to November nearly double the absorption of ₹2.2 lakh crore in the August - September period. RBI governor Shaktikanta Das expects liquidity conditions to improve in the coming periods ahead. He also added that RBI is ready to infuse additional cash through Liquidity Adjustment Facility (LAF) operations if need arises. RBI eased down the scale of the repo rate hike to 35 basis points in the latest monetary policy. 

As per RBI's data, year-on-year, money supply (M3) expanded by 8.9% as on November 18, 2022, while bank credit rose by 17.2%. India’s foreign exchange reserves were placed at $561.2 billion as on December 2, 2022.

RBI governor Shaktikanta Das said, "in the period ahead, liquidity conditions are likely to improve due to several factors which would include moderation in currency in circulation in the post-festival period, pick up in government expenditure in the last few months of the financial year and higher forex inflows due to the return of portfolio investors."

Das highlighted that tax outflows and currency demand do produce transient episodes of tight liquidity, but a holistic view needs to be taken.

He said, "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. Therefore, although the Reserve Bank remains in absorption mode, we are ready to conduct LAF operations that inject liquidity as may be needed through our main operations.

In doing so, however, Das also said that RBI 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.

"The Reserve Bank remains committed to flexibility and two-sidedness in liquidity operations, but the market participants must wean themselves away from the overhang of liquidity surpluses," Das added.

In December policy, RBI increased the repo rate by 35 basis points to 6.25% -- the highest level since August 2018. With that, the repo rate has been hiked by 225 basis points so far in FY23.

Consequently, the standing deposit facility (SDF) rate stands adjusted to 6%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50%.

MPC also remains focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.