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Managing excess liquidity: Financial markets need more clarity now | Current Affairs | Vision IAS

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Managing excess liquidity: Financial markets need more clarity now

2 min read

Liquidity Conditions in Indian Banking

The liquidity conditions in Indian banking have shifted considerably over recent quarters, moving from a deficit to a consistent surplus. As of 2024, the system recorded a daily surplus that sometimes exceeded ₹4 trillion.

Central Bank's Liquidity Management

  • The Reserve Bank of India (RBI) faced criticism due to a liquidity deficit, largely due to currency market interventions to support the rupee.
  • As pressure on the rupee decreased and inflation rates became favorable, the situation improved.
  • The RBI reduced the cash reserve ratio (CRR) by 100 basis points in four tranches, adding ₹2.5 trillion in liquidity.

Effects of Liquidity on the Economy

  • Excess Liquidity:
    • May increase inflationary risks, though inflation is currently in a comfortable range.
    • Possibly leads to asset-price inflation as banks reduce savings deposit rates.
  • Loan Incentives:
    • Increased liquidity might prompt banks to extend loans at lower rates.
    • Easy funds could lead to loans being given to less qualified entities.
  • Investment Trends:
    • Global uncertainty affects private sector investment decisions.
    • Corporations are increasingly raising funds from capital markets, with a 32.9% increase in 2024-25.
    • The year witnessed corporate bond issuance worth about ₹10 trillion.

RBI's Monetary Policy Approach

  • The RBI is conducting variable rate reverse repo auctions to manage liquidity.
  • The weighted average call rate remains below the policy rate to aid policy transmission.
  • The RBI needs to manage anticipated excess liquidity due to the CRR reduction and communicate its liquidity goals to the market clearly.
  • Tags :
  • Liquidity Management
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