The Reserve Bank of India (RBI) is taking significant steps to address the current liquidity shortage in the banking system, which is facing a shortfall of 3 trillion rupees. The central bank has announced a series of measures worth ₹1.5 lakh crore ($18 billion) to inject liquidity, helping to ease pressure on the money markets and support growth in India, Asia’s third-largest economy.
RBI’s liquidity measures include bond purchases, foreign exchange (forex) swaps, and repo auctions:
1. Bond Purchases: RBI plans to buy government bonds worth ₹60,000 crore ($6.9 billion) through three open market operations (OMOs). These purchases will occur in three auctions, scheduled for January 30, February 13, and February 20, with ₹20,000 crore being purchased in each auction. These bond buys are expected to lower rupee rates, signaling that the RBI will avoid tightening liquidity conditions.
2. Forex Swap: A forex swap auction of $5 billion (around ₹43,000 crore) will take place on January 31. This move aims to increase rupee liquidity in the banking system, offering much-needed support to banks.
3. Repo Auction: On February 7, RBI will conduct a 56-day variable-rate repo auction worth ₹50,000 crore. This auction will help banks meet liquidity needs through the end of March, covering the crucial period until the financial year closes.
These measures are expected to ease the liquidity stress in the banking system and are likely to have a positive impact on India’s financial markets. Brokerages have noted that RBI’s actions could lower bond yields and lead to a reduction in short-term interest rates, with the expectation of further open market operations if needed.
HSBC, in a recent note, highlighted that the market’s focus will now shift to the upcoming Union Budget on February 1 and the RBI’s monetary policy committee (MPC) meeting on February 7. Analysts believe there is a high possibility of a 25 basis point rate cut, which could further reduce borrowing costs.
Additionally, brokerages such as Emkay Global Financial Services are optimistic about the positive impact of these liquidity measures on the equity market, particularly in the Banking, Financial Services, and Insurance (BFSI) sector. Despite the market’s current condition, they believe it’s a good time for investors to start buying stocks, as valuations are more reasonable compared to previous months.
Last week, the RBI held discussions with banks regarding new liquidity regulations in response to concerns over credit flow. Banks requested deferment and alternative measures, highlighting a ₹4 lakh crore impact as funds are redirected to bonds. Under the leadership of new RBI Governor Sanjay Malhotra, the move tightens liquidity, resulting in a ₹3 lakh crore deficit.
The increase in liquidity and potential rate cuts could stimulate domestic consumption. However, Emkay Global stresses that it is crucial for the RBI to ease lending curbs on banks and Non-Banking Financial Companies (NBFCs), especially concerning unsecured loans. This would help reignite retail lending and support consumption growth in the second half of 2025.
Despite a net bond purchase of ₹101.75 billion ($1.18 billion) by the RBI last week, banking liquidity remains in deficit, with a shortfall exceeding ₹2 trillion. This follows a period in which the RBI had sold over ₹240 billion worth of bonds between July and September.
The measures come as the Indian sovereign bond market sees a drop in yields, with the 10-year bond yield falling to 6.65%, the lowest in nearly three years. Analysts expect further bond-buying operations to drive down yields and ease liquidity pressures in the system.
In summary, RBI’s latest interventions aim to restore liquidity and stability in India’s financial markets, easing pressure on banks while supporting growth ahead of critical policy decisions and fiscal developments in February.
Udpate
Rupee Weakens Amid Dollar Demand, RBI Moves
The Indian rupee weakened on Wednesday due to strong dollar demand from importers making month-end payments and a fall in the cost of hedging against the rupee’s decline. It traded at 86.5850 against the dollar, close to its all-time low of 86.6475. The Reserve Bank of India’s reference rate also pushed the rupee down early in the session, while the 1-month dollar-rupee forward premium dropped to 15.50 paisa, halving from its peak earlier in the month.
Update
The Reserve Bank of India (RBI) is set to hold a $5 billion dollar/rupee buy-sell swap auction this Friday, which is expected to see high demand from both banks and corporate treasuries, according to Reuters cites six bankers. This move is part of the RBI’s broader plan to inject approximately 1.5 trillion rupees (about $17.33 billion) into the banking system to boost liquidity. The auction will involve a 6-month dollar/rupee swap, where the RBI will purchase dollars on the spot market, which will provide rupee liquidity while reducing some of the dollar supply in the system. The swap will be reversed after six months.
The RBI’s actions, aimed at stabilizing the rupee as it hits record lows, have led to an increase in dollar liquidity in the banking system. Some of the dollar sales by the RBI have been picked up by banks engaging in arbitrage, leaving them with excess dollar holdings, according to an insider. Additionally, the six-month dollar-rupee forward premium recently stood at 94.50 paisa, having fallen by around 10 paisa since the RBI’s liquidity measures were introduced on Monday.
Update
On Friday, 31st January 2025, the Reserve Bank of India (RBI) conducted a 6-month dollar/rupee buy-sell swap auction, offering $5 billion. The auction saw strong demand, with bids totaling $25.59 billion, five times the amount on offer. A total of 253 participants submitted bids, reflecting significant interest in the swap, which aims to inject rupee liquidity into the banking system. This move is part of the RBI’s broader strategy to infuse around 1.5 trillion rupees of liquidity into the market.
The RBI accepted 28 bids, amounting to $5.1 billion, and set the premium cut-off at 96.81 paisa, which was slightly below the market rate before the auction’s outcome. Following the announcement, dollar-rupee forward premiums dipped, and the 1-year implied yield, which had been rising, was reduced to 2.24%. This shows how the auction results impacted the currency markets, adjusting the forward premium expectations slightly downward.
Update
India’s central bank, the Reserve Bank of India (RBI), announced on Monday, Feb 10, 2025, that it will buy more government bonds than previously planned to address the shortage of cash in the banking system.
On February 13, the RBI will purchase government securities worth 400 billion rupees ($4.57 billion), doubling the amount from the earlier announced 200 billion rupees.
This move comes as India’s banking system has faced a cash shortage for the past eight weeks, with the current deficit standing at 1.33 trillion rupees as of February 7.
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