- The Reserve Bank of India (RBI) has responded to tight liquidity conditions in the banking system by announcing a significant reduction in the government’s treasury bill sales and introducing a new selection of bonds for the Centre’s buyback operations.
- This move aims to alleviate cash constraints for banks, which have been impaired by muted government spending during the ongoing general elections.
- Following interactions with lenders amid tight liquidity conditions, the central bank has announced a steep reduction in the quantum of the government’s treasury bill sales and a new selection of bonds for the Centre’s buyback operations to aid freeing up cash for banks.
- Liquidity conditions in the banking system tightened considerably this month, largely due to a muted pace of government spending amid the ongoing general elections, market participants said.
- Tight liquidity conditions increase cost of funds for banks, especially at a time when credit growth continues to outpace deposit growth by a long margin. Higher borrowing costs for banks pushes up the cost of borrowing across the economy.
- By reducing the supply of treasury bills and offering bonds for repurchase at acceptable prices, the RBI seeks to inject liquidity into the banking system and ease borrowing costs for banks.
- This move comes amid muted government spending during the ongoing general elections.
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