Financial basis

RBI to rebalance liquidity on a dynamic basis


oi-Sunil Fernandes


The Reserve Bank of India is likely to balance liquidity on a dynamic basis. According to the RBI, the pandemic has caused a crisis like no other in a century, with a health shock turning into a macroeconomic and financial shock. The RBI has taken a series of measures to deal with such an exceptional situation.

RBI to rebalance liquidity on a dynamic basis

“As a result, borrowing costs have fallen to their lowest levels in decades and spreads have tightened between rating cohorts. Record levels of government securities, corporate bonds and debentures have issued Companies were able to transparently deleverage and reduce high-cost debt while improving profitability and retained earnings for future capital expenditures Overall, the financial sector remained fully functional and anchored the process of recovery. Our assessment is that the RBI’s policy actions delivered the desired results in a smooth and orderly manner,” the RBI said. said.

“As these objectives are met on a continuous basis, the Reserve Bank has turned to aggressive liquidity rebalancing, while maintaining adequate liquidity to support its accommodative stance. This rebalancing has involved two-pronged operations: firstly , the rebalancing of liquidity from the overnight fixed rate reverse repo to the 14-day floating rate reverse repo (VRRR) auction as the main operation, supported by settlement auctions end of different durations as foreseen in the revised liquidity framework of February 20221. Maturities of 1 to 3 days to deal with transient liquidity mismatches and during the third week of January 2022. The key to effective cash management is timing and having an agile approach that reacts quickly to how you t liquidity tilts,” the country’s central bank said.

As a result of RBI’s rebalancing trades, the average daily absorption under the fixed rate reverse repo has moderated sharply since August 2021, when the rebalancing began. However, the overall liquidity of the system remains largely in excess, even if it has moderated over the same period. Reflecting the migration of excess liquidity from the overnight window to longer maturities, the effective repo rate – the weighted average rate of fixed-rate repo and longer-maturity VRRRs – rose from 3.37% at the end of August 2021 to 3.87 percent at February 4, 2022.

Article first published: Thursday, February 10, 2022, 3:03 p.m. [IST]