The report highlights the normalization of operational structure of liquidity management by the RBI (a process that took almost 6-quarters) and its broad implications for short term money market rates and monetary policy transmission.

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May 03, 2023

QuantEco Research || Normalization of operational structure of liquidity management

With gradual ebbing of COVID concerns, the RBI has been normalizing liquidity operations starting Oct-21. The liquidity glut seen since the onset of the pandemic took nearly 6-quarters to get normalized. We estimate core liquidity (headline liquidity adjusted for government’s cash balances with the RBI) surplus to have shrunk to 0.4% of NDTL - lowest in the post COVID phase. From operational perspective, the weighted average overnight money market rate is now closely hugging the policy repo rate, in contrast to a discount of 49 bps in Apr-22. With core liquidity surplus expected to see further erosion in FY24, this could imply a pickup in monetary policy transmission in the coming months.