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Surplus liquidity occurs where cashflows into the banking system persistently exceed withdrawals of liquidity from the market by the central bank. Liquidity in the banking system refers to readily available cash that banks need to meet short-term business and financial needs.
The net liquidity in the banking system in India increased to Rs 2.59 lakh crore during 2023. However, the surplus liquidity in the banking system is likely to decline to around Rs 1.5 lakh crore over the next few days from the current level of Rs 2.1 lakh crore.
The net liquidity in the banking system is represented by the amount of money absorbed by the Reserve Bank of India (RBI) from the system.You can serch for various Posts and blogs on this topic in internet for furthur information.
Causes of Increased Liquidity:
Advance tax and goods and services tax (GST) pay- ments.
The deposit of withdrawn Rs 2,000 notes.
Redemption of government bonds.
Higher government spending.
The sale of dollars by the RBI to defend the rupee from depreciation.
Impact of Surplus liquidity:
It may lead to increased levels of inflation.
Interest rates in the market will remain low.
What are RBI’s Measures:
The RBI takes action if liquidity levels deviate from its comfort range.
The RBI, under its Liquidity Adjustment Facility, infuses liquidity in the banking system via repos and sucks it out using reverse repos after assessing liq- uidity conditions.
The RBI also uses a 14-day variable rate repo and/or reverse repo operation.
Various Instruments of Monetary Policy:
Repo Rate:
The interest rate at which the Reserve Bank pro- vides overnight liquidity, to banks against the col- lateral of government and other approved securities under the liquidity adjustment facility (LAF).
Reverse Repo Rate:
The interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
Liquidity Adjustment Facility (LAF):
The LAF consists of overnight as well as term repo auctions.
The aim of term repo is to help develop the inter- bank term money market, which in turn can set market based benchmarks for pricing of loans and deposits, and hence improve transmission of monetary policy.
The RBI also conducts variable interest rate reverse .repo auctions, as necessitated under the market conditions.
Marginal Standing Facility (MSF):
A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.
Corridor:
The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.
Bank Rate:
It is the rate at which the RBI is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the RBI Act, 1934.
This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
Cash Reserve Ratio (CRR):
The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
Statutory Liquidity Ratio (SLR):
The share of NDTL that a bank is required to main- tain in safe and liquid assets, such as, unencum- bered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
Open Market Operations (OMOs):
These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
Market Stabilisation Scheme (MSS):
This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilised is held in a separate government account with the RBI.