Surplus effect: RBI may have to suck out excess liquidity

K Ram Kumar Mumbai | Updated on September 02, 2019 Published on September 01, 2019

The Reserve Bank of India may need to sterilise the liquidity that will eventually find its way into the financial system once the government starts spending the staggering ₹1,76,051 crore surplus which was approved to be transferred by its central board last week.

In its capacity as the government’s banker and debt manager, the RBI may have to manage the surplus liquidity to stanch its possible inflationary effect.

In this regard, the RBI may resort to open market operation (OMO) sales (of government securities) to suck liquidity out of the financial system, otherwise it could have implications on the inflation front, say market experts.

OMO sales could be over and above the routine reverse repo auctions that the RBI conducts under its liquidity adjustment facility.

Under the reverse repo auction, banks deploy their surplus liquidity with the RBI. As part of this transaction, banks purchase securities from the RBI with an agreement to resell them to the latter on a mutually agreed future date at an agreed price which includes interest for the funds lent..

Under OMO, the RBI resorts to sale of securities to suck out the rupee liquidity. When the liquidity conditions are tight, RBI buy securities from the market, releasing liquidity.

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Published on September 01, 2019
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