RBI's fresh liquidity measures aimed at facilitating rate transmission

The Reserve Bank of India's (RBI’s) fresh measures on Wednesday to infuse approximately ₹1.87 trillion liquidity ahead of the financial year-end squeeze indicate its intent to shift the system into surplus so that there is transmission of policy rates. Interest rates have remained elevated in certain segments despite the 25 basis points (bps) repo rate cut in February due to tight liquidity.

 

The RBI announced open market operation (OMO) auctions to purchase government securities worth ₹1 trillion in two tranches of ₹50,000 crore each on March 12 and March 18. Additionally, it announced a USD/INR buy-sell swap auction for $10 billion with a tenor of 36 months.

 

As per latest RBI data, the banking system liquidity was in a deficit of around ₹55,000 crore as of March 6. The net liquidity in the banking system has remained in deficit mode for the past 11 consecutive weeks, despite the RBI announcing measures to inject liquidity, including OMO auctions worth ₹60,000 crore, and a $5 billion and $10 billion USD/INR buy-sell swap in January and February, respectively.

 

“The RBI’s stance on liquidity is certainly more proactive and suggests it wants the banking system in a surplus rather than a deficit,” said Nomura in its report.

 

According to Harsh Dugar, executive director, Federal Bank, the measures announced by the RBI will help improve the liquidity and give confidence to banks to consider lowering deposit rates and hence better effective transmission for marginal cost of funds-based lending rate (MCLR) loans.

 

“The intent is to try and not have a system in deficit, as we have major outflows coming up. These are measures to shore up the core liquidity, and banks want the short-term rates to soften,” said the treasury head at a private bank. 

 

The RBI’s active intervention in the foreign exchange market to avoid sharp decline in rupee against the dollar has been weighing on the banking system liquidity, along with tax outflows and volatility in capital flows. The system liquidity has moved from a surplus of ₹1.35 trillion in November last year to a deficit of ₹65,000 crore in December, further to ₹2.07 trillion deficit in January and ₹1.59 trillion in February.

 

The central bank’s concerted action, which includes tranches of OMOs, VRR (variable rate repo) auctions and forex swaps, besides a cash reserve ratio (CRR) reduction in December, have added more than ₹4 trillion to the domestic banking system thus far.

 

“A strong move to boost liquidity – latest measures are expected to lift core liquidity to a surplus – suggests that the overall policy stance is clearly accommodative, with an eye to facilitating policy transmission,” said Radhika Rao, executive director and senior economist, DBS Bank, on the fresh liquidity measures by the RBI.

 

“The injection across two instruments of approximately ₹1.87 trillion is more than we expected. Beyond the size, we see the timing as positive, as from our conversations with market participants, there were limited expectations for the RBI to announce new measures in March,” said Nomura in its report, adding that the measures announced will help bring down the deficit and can move the system into a small surplus.

 

However, one needs to monitor the RBI’s short forward book, which currently stands at $77.5 billion (net basis as of January 31, 2025), with a significant portion in the 0-3 month tenor. This can cause a significant drain on liquidity if rolled off, the report further said.

 

According to experts, despite the rate cut in February, corporate bond spreads and state government securities spreads over government securities widened, hampering transmission of rates, which needed to be addressed. Similarly, certificate of deposit (CD) rates climbed upwards, driven by tight liquidity concerns and upward pressure on bulk deposit rates.

 

“With outlier items falling off from inflation and a cyclical growth slowdown, the MPC (monetary policy committee) has cut repo rate in February. However, the underlying liquidity conditions thus far are not conducive to broadbased transmission even as lenders may have transmitted on loan rates, which are externally benchmarked,” said Suyash Choudhary, head – fixed income, Bandhan Mutual Fund.

 

“The measures announced are far more in size than any market expectation and possibly signal the RBI’s intent to sustainably move core liquidity into positive mode. With these steps, and with some help from global triggers, one can look forward to a substantially positive core liquidity environment, especially from end-May onwards,” Choudhary added.

RBI to purchase ₹50,000 crore securities via OMO on March 12  The Reserve Bank of India will conduct an open market operation (OMO) auction on 12 March to purchase securities worth ₹50,000 crore. The central bank will auction government securities (GS), including 7.10 per cent GS 2029, 7.18 per cent GS 2033, 7.10 per cent GS 2034, 7.40 per cent GS 2035, 7.41 per cent GS 2036, and 7.23 per cent GS 2039.  The RBI reserves the right to determine the quantum of purchase for each individual security, accept bids for an amount less than the total aggregate, purchase slightly more or less than the aggregate amount due to rounding, and accept or reject any or all bids, either in full or in part, without providing any reasons.