RBI's aggressive cash infusions ease India's liquidity deficit from 15-yr high

According to a Bloomberg Economics index, the liquidity deficit, reflected through banks’ borrowings from the Central bank, dropped to Rs 793 billion ($9 billion) as of March 6 — a sharp reduction from a 15-year high of Rs 3.3 trillion in late January.

The RBI’s measures since the end of January have played a crucial role in narrowing the gap, with total cash infusions expected to reach approximately $68 billion.

This liquidity improvement is anticipated to enhance interest rate transmission and provide economic support as growth slows to its weakest pace in four years.

“The RBI’s latest measures indicate that its focus is on making system liquidity positive to enable transmission of rate cuts,” Gaura Sen Gupta, chief economist at IDFC First Bank Ltd, was quoted as saying by Reuters.

She expects the banking system to see a liquidity surplus by the end of March, with scope for the RBI to inject an additional Rs 2 trillion in the upcoming fiscal year starting April 1.

The liquidity crunch was partly exacerbated by the RBI's dollar sales aimed at stabilizing the rupee amid global pressures, as the local currency hit successive lows.

Banks are now are also staring at significant cash outflows as corporates make quarterly advance tax payments ahead of the financial year-end in March.

In response, the RBI has introduced several liquidity-boosting measures, including open market bond purchases, variable rate repurchase (repo) operations, and foreign exchange swaps.

More bond purchases and another forex swap are scheduled for this month, further easing the cash shortfall.

The impact of these cash infusions has already begun to reflect in the financial markets.

Banks' overnight borrowing rates have dropped below the policy rate in recent days, reversing a trend from early January when the overnight rate was nearly 40 basis points higher.

Two-year government bond yields have also declined.

Suyash Choudhary, head of fixed income at Bandhan AMC Ltd., noted that the RBI’s recent liquidity measures surpassed market expectations, said the Reuters report.

“The scale of these actions suggests that the Central bank is prepared to inject more funds if liquidity conditions fail to improve as anticipated,” he said in a note.

The Central bank's continued efforts to stabilize liquidity are expected to not only ease borrowing costs but also facilitate stronger transmission of interest rate cuts, fostering growth momentum amid economic headwinds.