RBI's Strategic Move to Alleviate Liquidity Constraints

In a significant move to address the liquidity constraints exacerbated by its foreign exchange market operations and tax outflows, the Reserve Bank of India (RBI) is set to infuse nearly Rs 1.9 lakh crore into the banking system. This initiative is part of RBI's broader measures to support economic growth and comes after the central bank eased loans for microfinance and finance companies.

Open Market Operations and Swap Auctions

As part of these liquidity efforts, RBI will conduct open market operations to purchase government bonds worth Rs 1 lakh crore, with two separate auctions of Rs 50,000 crore each scheduled for March 12 and March 18. Additionally, RBI will conduct a buy/sell swap auction for $10 billion, which will have a tenor of 36 months, on March 24. This swap, where RBI buys dollars with an agreement to reverse the sale at a predetermined price after three years, will result in a Rs 87,000-crore liquidity infusion.

Impact on the Banking System and Economy

These liquidity measures come ahead of a significant outflow from the markets due to advance tax payments. The infusion of liquidity is expected to ease some of the pressures on the banking system, with RBI assuring that it will continue to monitor evolving liquidity and market conditions and take necessary measures to ensure orderly liquidity conditions. This follows RBI's recent reduction of interest rates by 25 basis points on February 6, marking its first rate cut in five years, as part of ongoing efforts to enhance liquidity in the bond markets.

Looking Ahead

Since mid-January, the central bank has infused over Rs 4.5 lakh crore into the system, including about Rs 1.4 lakh crore in bond purchases, around Rs 1.3 lakh crore via foreign exchange swaps, and Rs 1.8 lakh crore through early April-maturity repo auctions. The measures are expected to have a positive impact on the bond market and the rupee, with forward premiums likely to fall, supporting India's economic growth which stood at 6.2% in the December quarter, driven by increased government and consumer spending.