Bankers ask RBI for durable liquidity as deficit mounts to Rs 2 trillion

Amid funds in the money market drying up, bankers in a meeting with the Reserve Bank of India (RBI) this week asked for liquidity to be made durable.

 

The instruments to be used in this connection include open market operations, variable rate repo (VRR) auctions, and buy/sell swaps, said sources aware of the development.  According to the data, the RBI on Thursday infused Rs 2 trillion through the liquidity adjustment facility.

 

The RBI’s intervention in the rupee spot market to stem the depreciation of the domestic currency has further strained systemic liquidity. Over the past two months, the central bank is heavily intervening in the forex market. According to Nomura estimates, liquidity has dropped from Rs 4.6 trillion on September 27 to Rs 40,000 crore on December 27, and it has likely fallen further since.

 

“Bankers asked the RBI to provide durable liquidity for 30 days, 90 days, and 120 days. Following the meeting, the RBI today (Friday) provided 14 days, 4 days, and overnight liquidity. Additionally, it was urged to do some buy/sell swaps, which they have done,” said another source.

 

The RBI has conducted a buy/sell swap worth $500-700 million on Friday, because of which one-year forward premiums came down. Additionally, it is expected to do another $2 billion worth of buy/sell swaps, sources said.

 

Tight liquidity conditions have led to an increase in the cost of borrowing for short-term corporate bonds, as reflected in the cutoff for the National Bank for Agricultural and Rural Development’s (Nabard’s) fundraise on Friday amid calls  to delay the easing cycle and instead implement an additional cash reserve ratio (CRR) cut to infuse liquidity into the system, potentially paving the way for a repo rate cut thereafter. 

 

Nabard on Friday raised Rs 4,412 crore through bonds maturing in three years two months and 11 days at a coupon rate of 7.53 per cent, sources said.

 

The cutoff, although a bit high for an AAA-rated state-owned entity, is in line with market expectations due to extremely tight liquidity, sources added.

 

Additionally, some market participants suggested fundraising, particularly in short-term tenures, might slow due to the prevailing liquidity conditions. While there will be adequate supply, coupon rates are likely to be slightly higher than desired, they said.

 

“Short-term corporate-bond spreads appear to have widened slightly due to the present volatile market conditions amid persistent liquidity tightness, as seen in Nabard’s three-year issuance at 7.53 per cent,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP, adding that the RBI’s liquidity management, including the more than Rs 2 trillion injected through daily money market operations alongside continuous variable repo rate auctions, underscored the strain on system liquidity.

 

“Elevated T-bill borrowings and the preference for longer tenors have further added to the upward pressure on short-term yields,” Srinivasan added.

 

Economists are of the opinion that given the prevailing liquidity conditions, the RBI should prioritise liquidity management over rate cuts.

 

“We push back our call for 50 basis point (bp) repo rate cuts to April-June from February-April and revise our 2025 dollar-rupee forecast, given increased external-sector volatility, evidence of the RBI’s higher tolerance of a stronger dollar, and tighter banking-system liquidity,” said a report headlined by Anubhuti Sahay, head, India economic research, Standard Chartered Bank.

 

The report expects the headline liquidity deficit to widen further to Rs 2-2.5 trillion and the core to switch to a deficit of Rs 1-1.5 trillion by the end of March 2025, given seasonal patterns of currency leakage and the CRR maintenance requirement, even if the balance of payments (BoP) remains in surplus in this quarter.

 

According to Nomura, further CRR cuts cannot be ruled out, but it says alternative measures (to infuse durable liquidity) are now more likely. Unfortunately, there is no panacea, the RBI needs to be proactive and tackle the issue from several angles, the report added.

 

“There is a possibility of a rate cut in February due to a slowdown in the economy but growth is on track. The only reason there could be a cut in February is because two of the external members (Monetary Policy Committee) had voted for a cut in December policy despite inflation being over 5 per cent. But, I think, they should wait because there is a lot of volatility in forex. The currency is depreciating, which means that imported inflation will increase. Hence, there should be a pause,” said Madan Sabnavis, chief economist, Bank of Baroda.

 

The six-member Monetary Policy Committee will meet during February 5-7. The February policy will be the first for the new RBI governor, Sanjay Malhotra.