RBI announces auction to absorb Rs 10.5 lakh crore excess liquidity
GS3Economy · S&T · Environment · Security· Monetary policy, RBI & banking· Prelims·
Monetary policy and liquidity management: a key GS3 topic regarding RBI's role in maintaining economic stability.
Why in news
The RBI announced an auction to absorb Rs 10.5 lakh crore in excess liquidity from the inter-bank market to manage surplus funds from a special dollar-mobilisation scheme.
Background
The RBI initiated an auction to drain Rs 10.5 lakh crore from the inter-bank market. This follows a previous 30-day Variable Rate Repo (VRRR) auction that only drained Rs 2.59 lakh crore against a Rs 7 lakh crore target.
Facts for Prelims
- BodyRBI: The Reserve Bank of India manages liquidity in the inter-bank market.
- FactThe RBI announced an auction to absorb Rs 10.5 lakh crore in excess liquidity.
- FactThe previous 30-day VRRR auction drained Rs 2.59 lakh crore against a target of Rs 7 lakh crore.
Prelims practice question
With reference to the RBI's liquidity management actions, consider the following statements:
- The RBI is absorbing liquidity to manage surplus funds from a special rupee-mobilisation scheme.
- The RBI announced an auction to absorb Rs 10.5 lakh crore in excess liquidity.
- The previous 30-day VRRR auction successfully drained Rs 7 lakh crore.
Which of the statements given above is/are correct?
- (a)2 only
- (b)3 only
- (c)2 and 3 only
- (d)1, 2 and 3
Show answer
Answer: (a) 2 only — Statement 2 is correct. Statement 1 is incorrect: The funds are from a special dollar-mobilisation scheme. Statement 3 is incorrect: The previous auction only drained Rs 2.59 lakh crore against a Rs 7 lakh crore target.
For Mains
Q. Discuss the significance of liquidity management tools used by the RBI in maintaining monetary stability and controlling inflation in the Indian economy.
Dimensions to cover in your answer
- Monetary transmission: Impact of excess liquidity on interest rate stability and inflation targeting
- Liquidity management: Balancing surplus from dollar-mobilisation schemes with inter-bank market stability
Keywords: Liquidity Management · Monetary Policy · Inter-bank Market · Variable Rate Repo · Monetary Stability
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