The Reserve Bank of India (RBI) stated that it will inject additional liquidity to the tune of Rs.1 lakh crore into public sector banks by the end of March. This action is expected to increase flexibility in the banking system and helps banks meet their funding requirements. In its statement, RBI said that it will use a combination of appropriate instruments to proceed with the funding process.
March is when the financial year ends in India, and this is also the time when banks face issues related to cash crunch. The additional liquidity from RBI will help banks run smoothly with their regular operations and ensure proper transactions. Moreover, this action will help banks keep their short-term interest rates under check and benefit the borrowing companies.
RBI noted that this funding will happen in addition to its normal liquidity assessment facility (LAF) operations. The fund injection will happen in four phases of Rs.25,000 crore each through variable repo rate operations.
In response to the economic slowdown caused by various reform measures, the government originally proposed to infuse Rs.2.11 lakh crore into public sector banks across the country. This proposed plan was expected to happen over a period of 2 years. By infusing additional capital into banks, the government hopes to revive lending and boost economic growth across various sectors.
This capitalisation drive is being viewed as a key measure in reviving the economic growth of the country. Following the implementation of tax reforms through Goods and Services Tax (GST), the country’s economic growth for the first quarter of fiscal year 2018 slowed down to a three-year low and this sent panic waves across the country.
Economic growth has revived since then but the government is focusing on various initiatives to prevent a future slump in the economy. Additional funding in the banking sector is a measure to boost lending and increase growth in the manufacturing sector.