Recently, the Government of India decided to buy back its securities nearing maturity through a process of auctions. Despite the ₹40,000 crore face value notified by the GOI, the response was underwhelming with bids totaling ₹53,334 crore, of which only ₹10,512 crore were accepted. It appears that participants were conservative in their bidding, seeking better returns. With rate cuts currently off the table (at least for now), this raises the question: Could this buyback have been an attempt to inject liquidity into the system and stimulate an economy where inflation is showing some signs of abating? Furthermore, will such a move by the GOI make any substantial difference? Let’s explore this with data.
Short Term Liquidity – Cash Reserve Position of Scheduled Commercial Banks with RBI
Since the beginning of FY22, the cash reserve position of scheduled commercial banks with the RBI has been steadily increasing. This rise is primarily due to the high liquidity in the system. With the introduction of the Standing Deposit Facility (SDF), which allows banks to park excess funds with the RBI without any need for collateral, banks have been leveraging the attractive interest rates offered by the SDF process. Consequently, the cash holdings of banks with the RBI have surged, reaching ₹9.63 lakh crore as of May 15, 2024. The following two charts clearly illustrate this trend.
