“As (RBI) governor has clarified in his statement, the stance is all about the future course of policy rates. Liquidity is endogenous to the rate when the rate is the chief instrument of monetary policy. Liquidity follows the rate. You have to move liquidity to achieve a certain rate,” said RBI Deputy Governor Michael Patra, in a press briefing after the central bank’s monetary policy statement.
Since April 2022, the RBI has adopted a stance of focusing on withdrawal of accommodation to tackle inflation. Liquidity in the banking system has been at a deficit over the past six months, with the weighted average call rate (WACR) broadly remaining 20-25 basis points above the repo rate from August to January. The WACR is the operating target of the RBI’s monetary policy.
Banks lend and borrow short-term funds in the call money market and the rate of that borrowing – the WACR – determines pricing of several credit products. According to the RBI’s Monetary Policy Framework, the central bank aims to align the WACR with the repo rate through proactive liquidity management. The repo rate is currently at 6.50%.
“So far as liquidity conditions are concerned, these are being driven by exogenous factors, which are likely to correct in the foreseeable future, aided by our market operations. On our part, the Reserve Bank remains nimble and flexible in its liquidity management through two-way main and fine-tuning operations, in both repo and reverse repo,” RBI Governor Shaktikanta Das said.Das said that adjusted for government cash balances, potential liquidity was still at a surplus.From mid-December onwards, the RBI started regularly injecting short-term funds into the banking system through variable rate repo operations after a long hiatus. The central bank carried on with such infusions till late January, which was a month when deficit liquidity – as measured by banks’ borrowings from the RBI – topped ₹3 lakh crore, touching multi-year highs.In the first week of February, however, the WACR has eased towards the repo rate after a long hiatus. This is owing to a reduction in the banking system liquidity deficit following government expenditure and dollar inflows into local capital markets.
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