India’s liquidity deficit has decreased significantly, decreasing from a 15-year high of 3.3 trillion rupees (approximately $9 billion) in late January to 793 billion rupees (approximately $9 billion) as of March 6, according to a Bloomberg Economics index. This reduction is attributed to the Reserve Bank of India’s (RBI) measures to infuse cash into the banking system, which include auction-based open market bond purchases, variable rate repurchase agreements, and foreign exchange swaps. The RBI has also planned additional bond purchases and a forex swap for this month.
The RBI’s measures have successfully lowered banks’ overnight borrowing rates, which have fallen below the policy rate in recent days, and yields on two-year government bonds have also decreased. Earlier in January, the overnight rate was nearly 40 basis points higher than the RBI’s policy rate.
The RBI’s efforts to provide liquidity have been deemed necessary due to cash outflows linked to quarterly advance tax payments made by companies to the government before the end of the financial year in March. Additionally, the rupee has continued to reach new lows, which has led to the central bank selling dollars to protect the currency.
The expert noted that the additional measures introduced by the RBI this week are larger than what the market had anticipated, implying that the RBI is prepared to provide further liquidity if conditions do not improve as anticipated. The RBI’s focus is on ensuring system liquidity becomes positive to enable the transmission of rate cuts.
Overall, the RBI’s actions have helped to address one of India’s most severe liquidity shortages in recent times, which has been exacerbated by the ongoing global pandemic and geopolitical tensions. The success of these measures may indicate a positive trend for the Indian economy, which is expected to slow down its growth rate this year.