Central bank is absorbing the excess liquidity – for the second time – as the the banking system has been flushed with excess liquidity in recent days
The central bank is moping up Rs 10 billion through reverse repo tomorrow, following the last week’s reverse repo worth Rs 5 billion.
Repo injects liquidity and reverse repo absorbs excess liquidity from the banks. The central bank sells treasury bills to banks and financial institutions at certain rates to absorb liquidity also to main the monetary supply.
The banks and financial institutions do not need more than Rs 50 billion liquidity currently but they have over Rs 60 billion, that has made the central bank mob up Rs 10 billion.The reverse repo not only helps maintain money supply to control inflation but also helps stabilise interest rates. More money in the banks means low interest rates and people might start draw their deposits and channel to the semi-or-informal banking sectors and spend unnecessarily fueling the inflation that the central bank has planned to tame at eight per cent only.