The Reserve Bank of India is conducting auctions to absorb surplus liquidity from the financial system to control rising inflation, as liquidity levels are expected to exceed fifteen lakh crore by the end of September.
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Key takeaway
RBI absorbs surplus liquidity via longer-dated VRRR auctions to curb inflation.
- Step 1 · The triggerRBI conducts longer-dated VRRR auctions to absorb surplus liquidity from the banking system
- Step 2 · Knock-onshort-term money market rates rise as liquidity tightens, increasing banks' cost of funds
- Step 3 · Knock-onbanks pass on higher funding costs to SME borrowers through increased lending rates on working capital loans
- Step 4 · Reaches youIndian SMEs with floating-rate or frequently renewed working capital facilities face higher interest expenses, squeezing cash flow and margins
The trigger is reported by the source below. The steps that follow are Branch²’s traced reasoning — how the shock could reach a business like yours, not a prediction.
Source: IN:Economic Times
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