RBI bid to drain surplus liquidity and improve rate transmission sees muted response
Banks parked just Rs 79,655 crore in the central bank’s 29-day variable rate reverse repo (VRRR) auction, less than half the Rs 2 lakh crore absorption planned in the offer. Draining liquidity is considered crucial for quicker and effective transmission of increases in policy rates.
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Context
The (RBI) experienced a weak response from banks in its attempt to drain surplus liquidity using a 29-day Variable Rate Reverse Repo (VRRR) auction, receiving less than half of the targeted Rs 2 lakh crore. This surplus liquidity is hindering the effective monetary transmission of recent policy rate hikes, though the central bank expects the excess funds to drain by the end of the fiscal year due to robust credit offtake and the festive season.
UPSC Perspectives
Economic
This article highlights the complex dynamics of liquidity management and monetary transmission. The uses tools like the Variable Rate Reverse Repo (VRRR) to absorb excess cash from the banking system. By removing this surplus, the RBI aims to push the Weighted Average Call Rate (WACR) (the actual rate at which banks lend to each other overnight) closer to the policy repo rate. When liquidity is too high, banks have cheap funds and are reluctant to raise lending rates, stalling the transmission of the RBI's rate hikes to consumers. The tepid response to the 29-day VRRR suggests banks prefer short-term liquidity management (like the daily VRRR) over locking up funds for a month, despite the RBI offering a call option (allowing early withdrawal). The surplus itself was partly generated by the RBI's own interventions, such as a dollar mobilisation programme and a dollar-rupee swap, demonstrating how different central bank actions can sometimes create competing challenges. For UPSC, understanding the relationship between system liquidity, the Liquidity Adjustment Facility (LAF), and the effectiveness of monetary policy is crucial.
Governance
The article also briefly mentions significant proposed changes to the (GST) framework discussed at a meeting. The proposal to allow 16 lakh small businesses to file only one GST return a year aims to reduce the compliance burden and improve the ease of doing business. More significantly, the reported scrapping of tax officers' arrest powers and raising the prosecution threshold to Rs 5 crore addresses concerns about tax terrorism and arbitrary harassment by authorities. This reflects a shift towards a more taxpayer-friendly regime, emphasizing trust-based governance over punitive measures. From a UPSC perspective, this illustrates the evolving nature of indirect tax administration in India and the ongoing efforts to balance revenue collection with a conducive business environment.