MUMBAI: RBI is set to infuse nearly Rs 1.9 lakh crore into the banking system to address liquidity constraints, which have been exacerbated by the central bank’s foreign exchange market operations and tax outflows. The move, seen as part of RBI measures to support growth, comes on the back of the central bank easing loans for microfinance and finance companies.
As part of these liquidity efforts, RBI will conduct open market operations to purchase govt bonds worth Rs 1 lakh crore, with two separate auctions of Rs 50,000 crore each scheduled for March 12 and March 18. Additionally, RBI will conduct a buy/sell swap auction for $10 billion, which will have a tenor of 36 months, on March 24. The swap (where RBI buys dollars with an agreement to reverse the sale at predetermined price after three years) will result in a Rs 87,000-crore liquidity infusion.
These liquidity measures come ahead of a significant outflow from the markets due to advance tax payments. “The ides of March (March 15) are when the money markets see the worst liquidity crunch due to advance tax outflows,” said a bond dealer. The infusion of liquidity is expected to ease some of the pressures on the banking system.
RBI has assured that it will continue to monitor evolving liquidity and market conditions and take necessary measures to ensure orderly liquidity conditions. RBI reduced interest rates by 25 basis points on Feb 6, marking its first rate cut in five years, as part of ongoing efforts to enhance liquidity in the bond markets.
On Feb 28, RBI had conducted a dollar/rupee swap worth $10 billion to inject long-term liquidity into the system, which attracted robust demand.
As of March 4, Indian banks’ liquidity deficit stood at Rs 20,420 crore, the lowest level since Dec 15.
Lower rates and easier liquidity will help in bank credit growth which has slowed down to 11.2% in Dec. India’s economy grew by 6.2% in the Dec quarter, driven by increased govt and consumer spending. Since mid-Jan, the central bank has infused over Rs 4.5 lakh crore into the system, including about Rs 1.4 lakh crore in bond purchases, around Rs 1.3 lakh crore via foreign exchange swaps, and Rs 1.8 lakh crore through early April-maturity repo auctions. The measures are expected to have a positive impact on the bond market and the rupee, with forward premiums likely to fall.
