Analysts told Reuetrs that the Reserve Bank of India (NSE:BOI) (RBI) must infuse at least an additional 1 trillion rupees ($11.54 billion) into the banking system by the end of March to address a persistent liquidity shortfall. Despite recent cash injections, durable liquidity remains in deficit.
Since mid-January, the RBI has actively intervened in the foreign exchange market and taken other measures, resulting in a sharp liquidity decline. In response, the central bank has conducted open market operations, including bond purchases and currency swaps, to provide funds to the banking sector.
In early February, the RBI lowered its key interest rate for the first time in nearly five years. However, market participants have stressed the importance of adequate liquidity to ensure that the rate cut effectively translates into more accessible lending from banks.
As of February 20, the liquidity deficit in India’s banking system stood at around 1.7 trillion rupees. Economists from IDFC First Bank (NASDAQ:FRBA) and QuantEco Research have suggested various strategies for the RBI to manage this gap, including more open market bond purchases and encouraging non-resident Indian deposits.
The RBI has already bought bonds worth 1.39 trillion rupees and conducted a $5 billion dollar/rupee swap, injecting approximately 440 billion rupees. Additionally, the central bank has provided 1.83 trillion rupees through long-term repos set to mature in early April.
Analysts anticipate further actions by the RBI, such as conducting 800 billion rupees of bond purchases and another $5 billion swap before March-end. There is also a possibility of rolling over the repos for an additional two months as liquidity is expected to improve when the RBI pays a dividend to the government by the end of May.
The central bank’s recent operations have included 1 trillion rupees through open market operations, 388.15 billion rupees from secondary market bond purchases, around 440 billion rupees from foreign exchange swaps, and various repos totaling nearly 1.83 trillion rupees.
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