Liquidity deficit in the banking system continues to widen with the latest data showing it breaching ₹3 lakh crore.
The system’s shortage as reflected by banks’ borrowing from the Reserve Bank of India (RBI) shot up to nearly ₹3.16 lakh crore on Thursday as per data from the central bank. This is the highest since at least 2010 according to Bloomberg Economics Index.
Economists have attributed the shortage to the RBI’s intervention in the forex markets to protect the rupee. When the central bank sells dollars, it absorbs rupee liquidity.
The rupee has come under pressure particularly after the results of the US Presidential elections in November that saw the victory of Donald Trump.
Markets apprehend Trump's trade policies to stoke up inflation in the US, reducing the chances of interest rate cuts by the Fed.
The rupee has also come under pressure because of persistent sales from FIIs on account of expensive valuations, tepid corporate results and slowdown of the domestic economy.
Economists have been calling for the infusion of durable liquidity from the RBI to plug the gap.
The central bank has responded by announcing daily variable rate repo (VRR) auctions to infuse cash.
On January 15, the RBI said it will conduct such auctions on all working days with the reversal taking place on the next working day.
On Friday, it announced a VRR auction of ₹2 lakh crore which will be conducted on Monday.
The RBI has also been conducting 14-day VRR auctions.The central bank received bids for nearly ₹1.63 lakh crore against the notified amount of ₹1.75 lakh crore in Friday's auction.
The extent of demand was more for the daily VRR auction where it received bids for ₹2.22 lakh crore compared with the notified amount of ₹2 lakh crore.