After $ deluge, RBI fights excess liquidity

MUMBAI: The exceptionally high dollar haul of $137.34 billion through Reserve Bank of India’s special dollar-rupee forex swap facility has created a problem of plenty for the banking system, which is now loaded with Rs 10 lakh crore of excess liquidity.

Analysts say RBI needs to drain the surplus liquidity before it puts downward pressure on short-term interest rates or creates inflationary pressures.

They suggested a combination of liquidity-management tools, including VRRR (variable rate reverse repo) auctions, raising the cash reserve ratio (CRR), and deploying the Market Stabilisation Scheme and Open Market Operation sales.

Aditi Gupta, economist at Bank of Baroda, said system liquidity moved from a surplus of Rs 1.6 lakh crore initially to Rs 6.7 lakh crore by August-end and further to Rs 9.7 lakh crore as of September 2.

Radhika Rao, senior economist at DBS Bank, suggested a temporary CRR hike.

Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said Cash Management Bills and Treasury bills could be more effective tools. RBI can also conduct sell-buy forex swaps, she added.

RBI has been absorbing the excess liquidity, having already announced VRRR auctions totalling Rs 53.5 lakh crore between August 6 and September 2 to manage the liquidity surplus, said Aditi Gupta, economist at Bank of Baroda