RBI announces measures to manage liquidity conditions

The RBI has announced a series of measures to manage liquidity conditions. These include ₹60,000 crore worth of Open Market Operations (OMOs) to purchase Government securities, a 56-day Variable Rate Repo (VRR) auction of ₹50,000 crore, and a $5 billion USD/rupee buy/sell swap auction for a six-month tenure.

OMOs refer to the buying and selling of securities in the open market by the country's central bank. The VRR is a short-term tool used by the RBI to adjust liquidity in the banking system. It allows banks to borrow funds at an interest rate determined through an auction process, with the RBI deciding the auction amount. This tool is part of the Liquidity Adjustment Facility.

The RBI has the flexibility to conduct overnight or longer-term repo auctions at fixed or variable rates, depending on market conditions.

The liquidity issue in Indian banks can be attributed to several factors:

• Lag effect: Liquidity from the government reaches the market after a delay, leading to fluctuations.
• Inflation control measures: At times, the RBI maintains higher interest rates to control inflation.
• Other factors: Increased cash withdrawals due to festival demand, as well as slower deposit growth compared to advances over the past year, also contribute to the liquidity squeeze.

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