Draining out money is a big task and RBI will need to use longer term tools for this purpose. MSS, OMO sales, long term reverse repos are some options.
In order to neutralize excess systemic liquidity, RBI has taken various steps such as fine-tuning variable reverse repo auction, selling of government bonds and stopping of G-SAP operation recently. RBI started fine tuning variable reverse repo since September 2021. On 18th October, variable reverse repo auction under fine tuning stood at Rs 2000.13 billion. During FY22, RBI has sold government bonds of Rs 500 billion as of 30th September. In last MPC meeting, RBI has made no announcement regarding further G-SAP auction which indicates its current discontinuation in current scenario.
During FY22, RBI has purchased Government of India bonds worth Rs 2145.75 billion through G-SAP and special OMO as of 30th September 2021.
Total Forex reserves stood at USD 639 billion as of 8th Oct 2021. RBI bought net amount of USD 3.74 billion in Aug 2021 and has cumulatively bought USD 39.64 billion during Apr-Aug 2021. RBI publishes fx data with a one-month lag.
RBI net outstanding forward purchases were USD 49.60 billion as of Aug 2021 from net forward purchase outstanding of USD 49.01 billion as of July 2021.
System liquidity declined by around Rs 141 billion month on month and was at a surplus of Rs 7097 billion as of 14th Oct 2021. Reverse Repo stood at Rs 8.18 trillion. Currency in circulation declined by Rs 96 billion on monthly basis in Oct 2021(as of 8th Oct).
The ICDR as of 24th Sep 2021 was 51.41%, credit grew by Rs 6852.11 billion, year on year, while deposits grew by Rs 13326.34 billion. Banks have to maintain CRR of 4% at present and SLR of 18.00%, and ideal ICDR for liquidity neutrality for banks is around 75%.
Liquidity Cheat Sheet
The Liquidity Cheat Sheet is for assessing system liquidity and the drivers of system liquidity.
System liquidity is defined as bids for Repo, Reverse Repo and Term Repo/Reverse Repo LAF (Liquidity Adjustment Facility), Long Term Repo Operations (LTROs)/Targeted Long-Term Repos Operations (TLTROs) auctions held by the RBI. Drawdowns from MSF and Export Credit Refinance Facility are the other constituents of system liquidity.
The need for liquidity is largely driven by the requirement to maintain CRR (Cash Reserve Ratio) balances with the RBI. Deficit system liquidity suggests that banks require to borrow from RBI to maintain CRR balances while surplus liquidity suggests that banks have excess funds over and above maintaining CRR balances.
The drivers of system liquidity include Currency in Circulation (outflows), RBI fx purchase (inflows)/ sales (outflows), RBI OMO sales (outflows)/purchase (inflows) and government surplus (outflows)/ deficit (inflows).
Currency in Circulation is money going out of banking system and being held as cash by the public. For example, if you draw cash from an ATM, money goes out as cash. Currency in Circulation is determined by need to hold cash for transactions and cash held as black money. Inflation affects need to hold cash as value of goods and services increases due to inflation.
RBI purchasing USD adds INR liquidity while USD sales lower INR liquidity as the central bank pays or receives INR for buying/selling USD.
RBI selling bonds through OMO takes out liquidity as markets pays RBI for buying bonds while bond purchases through OMO infuses liquidity as RBI pays the market for buying bonds. Maturity of RBI forward sale/purchase contracts also affect system liquidity.
Government surplus is money kept with the RBI while government deficit is money borrowed from the RBI. Government surplus is liquidity negative as money goes out of banking system into government account with RBI. Government deficit is liquidity positive as RBI lends money to government through WMA (Ways and Means Advances) facility. Government spends money by drawing down on WMA and that adds to banking system liquidity.
Others include IPO inflows that add to bank deposits, spectrum and other license auctions that add to government cash balances and MSS (Market Stabilization Scheme) that takes out liquidity from system as market pays for purchasing MSS bonds.
Advance tax payments goes out of banking system into government account with the RBI every quarter i.e. 15th of June, September, December and March.
Government bonds that mature and come up for redemption adds to banking system liquidity as money goes from government to holders of the bonds.
Government pays interest of around Rs 4000 billion every year and that adds to system liquidity.
Liquidity Operations (In INR Billions)
Liquidity Adjustment Facility | Amount Outstanding | Amount Outstanding | Amount Outstanding |
Liquidity Adjustment Facility | 18-08-21 | 16-09-21 | 14-10-21 |
(i) Repo | 0 | 0 | 0 |
(ii) Term Repo | 0 | 0 | 0 |
(iii) LTRO | -15.3 | -15.3 | -15.3 |
(iv) TLTRO | -827.62 | -831.62 | -841.12 |
(v) Reverse Repo | 8,383.71 | 8,352.23 | 8,175.04 |
MSS, CMB Bonds Outstanding | 0.00 | 0.00 | 0.00 |
Marginal Standing Facility | 0.00 | 0.00 | -4.50 |
Standing Liquidity Facility Availed from RBI | -232.96 | -266.96 | -216.96 |
Liquidity Deficit/Surplus | 7,307.83 | 7,238.35 | 7,097.16 |
Incremental Liquidity Deficit/Surplus | 1670 | -69 | -141 |
Liquidity Drivers | 17th Jul 2021-18th Aug 2021 | 19th Aug 2021-16th Sep 2021 | 19th Aug 2021-16th Sep 2021 |
Growth Currency in Circulation | -79.35 | -211.95 | -96.46 |
RBI FX Operations USD Billion | 49.60 | 0.00 | 0.00 |
RBI FX Operations Inflow/Outflow INR Billion | 2,974.64 | 0.00 | 0.00 |
RBI OMO Sale | 0.00 | 0.00 | -300.00 |
RBI OMO Purchase + Government Repurchase | 450.00 | 250.00 | 300.00 |
Government Surplus/Deficit | 0.00 | 0.00 | 0.00 |
RBI Fx Forward Sales (-)/Purchase (+) Outstanding USD Billion | 0.00 | 0.00 | 0.00 |
RBI Fx Forward Inflow/Outflow INR Billion | 0.00 | 0.00 | 0.00 |
Inflows/Outflow from Government | 0.00 | 0.00 | 0.00 |
Adjustment* | -1,674.82 | -107.53 | -44.73 |
Net Inflow/Outflow of Liquidity | 1670 | -69 | -141 |