Liquidity faces a bit of squeeze as Rs 2 lakh crore flows to tax kitty
GS3Economy · S&T · Environment · Security· Monetary policy, RBI & banking· Prelims·
Why in news
The RBI's 7-day variable rate repo operation saw significantly lower-than-expected bids due to liquidity tightening from tax outflows and forex interventions.
Background
The RBI attempted to inject ₹1.5 lakh crore into the banking system via a 7-day variable rate repo operation but received only ₹48,014 crore in bids. This liquidity squeeze was exacerbated by a 1.5% decline in the rupee's value following US-Israeli offensive actions on Iran.
Facts for Prelims
- S&TVariable rate repo operation: A central bank tool to inject liquidity into the banking system by lending to banks against securities.
- FactRBI received bids for only ₹48,014 crore against a target of ₹1.5 lakh crore in the recent repo operation.
- FactThe rupee declined by 1.5% since the start of the US-Israeli offensive on Iran.
- FactEconomists estimate the RBI sold over $15 billion from its forex stockpile in the past couple of weeks.
For Mains
Q. Analyze how fiscal requirements like advance tax outflows and external geopolitical shocks influence the RBI's monetary policy stance and liquidity management.
Dimensions to cover in your answer
- Monetary-Fiscal friction: Conflict between tax-driven liquidity drainage and the RBI's objective to maintain stable money supply.
- External shock vulnerability: Impact of geopolitical tensions on forex reserves and currency depreciation on domestic liquidity.
Keywords: Liquidity management · Repo operation · Monetary policy · Forex intervention · Fiscal outflow
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