RBI: Volatility also declined significantly

Despite the waning of liquidity pressures in early April, stronger-than-usual currency demand during the first two months of the financial year and build-up of cash balances by the Government from the second week of May, tightened liquidity conditions from mid-May, said RBI.

Despite the waning of liquidity pressures in early April, stronger-than-usual currency demand during the first two months of the financial year and build-up of cash balances by the Government from the second week of May, tightened liquidity conditions from mid-May, said RBI.

In order to mitigate these pressures, the Reserve Bank injected liquidity through purchases under open market operations (OMOs) of Rs.700 billion during April-May in pursuance of the revised liquidity management framework outlined in the April bi-monthly policy statement.

Additionally, liquidity was injected through variable rate repos of various tenors, in addition to the regular 14-day term repos and overnight fixed rate repo and MSF. 

The average daily net liquidity injection through the liquidity adjustment facility (including MSF) declined from Rs.1935 billion in March 2016 to Rs. 1030 billion during April-May and further to Rs. 120 billion in June (up to June 5, 2016). The weighted average call money rate (WACR) remained closely anchored to the policy rate within a narrower corridor of +/- 50 basis points around the policy repo rate. Volatility also declined significantly. Interest rates on money market instruments such as certificates of deposit (CDs) and commercial paper (CPs) also eased through the quarter so far.