 "Reserve Bank of India, RBI")
The Reserve Bank of India (RBI) on Tuesday announced an open market operation (OMO) to pump ₹80,000 crore into the banking system. The move, which comes just a week ahead of the April monetary policy committee (MPC) review meeting, is aimed at ensuring the effective transmission of policy rate cuts, according to bankers.
The RBI’s announcement also comes days after the banking system’s liquidity — measures of the central bank’s infusion/absorption through the liquidity adjustment facility — turned surplus (on Saturday and Sunday) after a gap of over four months. Surplus liquidity aids the transmission of policy rates during an easing cycle, and vice versa.
The bond purchase will be in four tranches of ₹20,000 crore each to be held on April 3, April 8, April 22, and April 29. The RBI said the move is to ensure orderly liquidity conditions.
“The RBI will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions,” the RBI said while announcing the OMO.
Economists said OMO purchase plan was an indication that the RBI was focused on maintaining a significant surplus in the banking system, which is essential for effective transmission of rate cuts.
“As past cycles have shown that transmission occurs when liquidity surplus is consistently around ₹1 trillion to ₹2 trillion. Despite expectations that the RBI might slow down these operations due to the upcoming RBI dividend, the central bank’s actions suggest they are committed to ensuring sufficient liquidity for transmission. However, a change in stance is unlikely at the upcoming RBI meeting in April,” said Gaura Sen Gupta, chief economist at IDFC FIRST Bank.
The RBI’s six-member MPC is widely expected to cut the policy repo rate by 25 basis points (bps) for the second consecutive meeting, scheduled for April 7–9.
The domestic rate-setting panel cut the policy repo rate by 25 bps in February, after keeping it unchanged for 11 consecutive meetings. While external benchmark-linked loans, which are mostly tied to the repo rate, have fallen in tandem with the repo rate cut, not many banks have revised their marginal cost of fund-based lending rates (MCLR), which apply to companies. MCLR, in turn, is linked to the cost of funds, and banks have not reduced deposit rates so far due to tight liquidity conditions.
The net liquidity in the banking system improved to surplus after more than four months, driven by government spending and the RBI’s ongoing efforts to inject liquidity through dollar-rupee buy/sell swap auctions, OMOs, and variable rate repo auctions, said experts.
The net liquidity was in surplus by ₹89,398 crore on Sunday, according to the latest data from the RBI. The core liquidity was in surplus by ₹1.1 trillion as of March 21.
“This is largely due to government spending, along with the durable liquidity infusion by the RBI since December. Additionally, government expenditure tends to increase towards the end of each month, especially in March, when spending is typically higher. This includes both central and state government expenditures,” Gupta said.
Since January, the RBI has injected over ₹5 trillion of durable liquidity into the banking system through government securities purchases via OMO auctions and dollar-rupee buy-sell swaps. Another ₹1.8 trillion was infused through repos maturing in early April.
The RBI has also actively managed liquidity by adjusting repo volumes daily and conducting multiple auctions in a single day.
“This improvement (in liquidity) in our view is also partially explained by a decline in government cash balances (₹1.7 trillion in March 7 versus ₹2.8 trillion in December 27), implying higher government spending,” said Suresh Ganapathy of Macquarie Capital in a report on Monday.
Top central bank officials will meet bankers on Thursday to review the current liquidity framework, another move aimed at improve monetary transmission.
