RBI likely to maintain tight liquidity stance in upcoming monetary policy

The RBI, unveiling its following monetary policy on February 8, is anticipated to continue with finetuning processes.

As the Reserve Bank of India (RBI) prepares to announce its monetary policy on February 8, treasury heads and economists anticipate that the central bank will continue its tight liquidity stance. This approach aims to facilitate the transmission of previous interest rate increases more effectively and manage inflation levels.

Tight Liquidity Conditions to Persist

Recent months have seen the RBI maintain tight liquidity conditions, with indications that such measures will persist. While there may be some easing of liquidity in the future, the RBI is expected to carefully manage liquidity levels.

Expectations of RBI’s Approach

V Ramachandra Reddy, head of treasury at Karur Vysya Bank, suggests that the RBI may adjust its language on liquidity, providing assurance to the market through fine-tuning operations to maintain liquidity at the desired level. 

Similarly, Sakshi Gupta, economist at HDFC Bank, anticipates that liquidity will remain tight in the near term, particularly as government spending increases.

Focus on Liquidity Management

RBI Governor Shaktikanta Das has emphasized the importance of liquidity management, stating that the central bank will adapt to changes in liquidity conditions. 

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Despite ongoing tightness in liquidity, the RBI has provided support through variable rate repo (VRR) auctions in response to significant outflows from the banking system.

Current Liquidity Situation

Presently, the banking system faces a deficit of approximately Rs 1.01 lakh crore. However, the RBI has recently conducted variable rate reverse repo (VRRR) auctions. 

Experts attribute this to higher funds parked by certain banks in the Standing Deposit Facility (SDF) and a decline in overnight rates.

Conclusion: Continuing Focus on Liquidity Management

In light of these factors, experts anticipate that the RBI will maintain its focus on liquidity management in the upcoming monetary policy, with an emphasis on fine-tuning operations to address any emerging challenges.