The Reserve Bank of India (RBI) has announced various measures on Monday which are expected to inject over Rs 1.5 lakh crore liquidity into the banking system. This marks the largest monetary easing ever since the pandemic.
The decision came around 10 days ahead of the six-member Monetary Policy Committee’s (MPC) decision on the repo rate
The Reserve Bank of India (RBI) has announced various measures on Monday which are expected to inject over Rs 1.5 lakh crore liquidity into the banking system. This marks the largest monetary easing ever since the pandemic.
RBI's liquidity infusion plan comprises three measures. The central bank will conduct a govt bond buy-back worth Rs 60,000 crore in three tranches scheduled for January 30, February 13 and February 20, 2025. It also plans to hold a long-term 56-day variable rate repo auction for Rs 50,000 crore on February 7. Lastly, RBI will execute a US dollar-rupee buy/sell swap auction of $5bn with a six-month tenure.
The decision came around 10 days ahead of the six-member Monetary Policy Committee’s (MPC) decision on the repo rate. The RBI's MPC is scheduled to announce its policy review on February 7, after the union budget on February 1.
"With core liquidity being negative close to about Rs. 80,000 crores, there was clearly a need to add durable liquidity beyond the daily VRR auctions that largely addresses the frictional liquidity tightness in the banking system," said Rajeev Radhakrishnan, Chief Investment Officer-Fixed Income at SBI Mutual Fund.
India's banking system liquidity deficit had widened to a one-year peak in the previous fortnight.
With RBI's announcement, hope for a rate cut in February also resurfaced, which was tamed due to high inflation and liquidity crunch.
"Given that liquidity actions have a far direct and sustained impact, which has been done, there is merit in pushing back rate cuts possibly until there is more clarity on the external front as well as the evolution of domestic growth inflation mix as well as liquidity conditions over the coming quarters. The April review possibly remains a better bet for the same," Radhakrishnan noted.
The RBI is facing the challenge of providing liquidity support to ensure smooth credit flow, amid the ongoing liquidity crunch in the banking system.
Generally, open market operations (OMOs) are a standard tool to infuse primary liquidity. However, banks operating close to their minimum Liquidity Coverage Ratio (LCR) do not have the flexibility to participate in this.
Many industry watchers and union ministers anticipate rate cuts from the central bank to boost growth, however, it is unlikely to achieve their intended impact without addressing systemic liquidity shortages. If banks are burdened with high deposit costs, they cannot pass on rate cuts effectively either.