The measure included a ₹60,000-crore Open Market Operations(OMO) purchase auctions of Government securities, a 56-day Variable Repo Rate (VRR) auction of ₹50,000 crore, and a $5-billion USD/rupee buy/sell swap auction for a six-month tenure.
- Open market operation (OMO) refers to the purchase and sale of securities in the open market by the Central Bank of a country.
- VRR is a short-term liquidity adjustment tool employed by the RBI to supply funds to the banking system.
- Under this mechanism, banks borrow funds at an interest rate determined through an auction process.
- The auction amount is decided by the RBI.
- It is a tool under Liquidity Adjustment Facility.
- Under this, RBI has the discretion to conduct overnight repo or longer term repo auctions at fixed rate or at variable rates depending on market conditions and other relevant factors.
Reason for liquidity issue in Indian banks
- Lag effect: The liquidity from the government side comes into the market after a gap which causes fluctuations in liquidity.
- Inflation control measures: Sometimes RBI controls inflation by keeping higher rates.
- Other: Higher cash withdrawal led by the festival demand, deposits have been growing slower than advances over the past one year, etc.
