The Reserve Bank of India (RBI) injected funds into the banking sector on Friday, with the weighted average call rate, a measure of short-term borrowing rates, rising 23 basis points above the policy repo rate to 6.73%.
According to analysts, the RBI used a variable rate repo auction (VRR) to inject Rs 25,000 crore in order to prevent recent foreign outflows of domestic debt and equity from raising banks’ cost of capital. The RBI has now held two such auctions after shifting its position to neutrality in response to the removal of accommodation.
The weighted average money market rate has been lagging behind the repo rate since August, which is indicative of the effects of excess liquidity. Currently, the repo rate is 6.50 percent. Due to excess liquidity, the weighted-average overnight money market rates in August momentarily fell below the standing deposit facility (SDF) rate.
How much did the auction bring in for RBI?
The RBI got bids from banks totaling ₹35,420 crore in Friday’s auction, which is more than the ₹25,000 crore that was announced. This indicates that lenders are needed to provide cash.Foreign investors have sold $4 billion worth of Indian equities and bonds so far in November, according to depository data, and the rupee has dropped by over 0.5% to 84.45/$1. Currency dealers said the rupee’s further depreciation was prevented by the RBI’s likely intervention.
How does RBI control liquidity?
The RBI can control excessive inflation by utilizing the liquidity adjustment capability. It accomplishes this by raising the repo rate, which drives up debt servicing costs. As a result, the money supply and investment in India’s economy decline.
In contrast, the RBI can cut the repo rate to entice companies to borrow, hence expanding the money supply, if it wishes to boost the economy following a period of sluggish development. For instance, in May 2022, the RBI raised the repo rate from 4.00% to 4.40%, a 40 basis point rise. From 3.75% in 2020, the reverse repo rate was lowered to 3.35%.
