RBI's Massive Liquidity Injection and Rate Cuts

Since mid-January, the Reserve Bank of India (RBI) has infused over Rs 5 lakh crore into the banking system through various measures including bond purchases, forex swaps, and early-April maturity repos. In an effort to maintain surplus liquidity and ensure the transmission of its rate cuts to borrowers, the RBI plans to inject an additional Rs 50,000 crore through bond repurchases.

Impact on Corporate Borrowing Costs

Despite a 25-basis-point cut in the repo rate in February, which provided some relief to homebuyers, corporate borrowers have not seen a reduction in their cost of funds. This is primarily because the interest rate for corporates is tied to the one-year marginal cost of lending rates (MCLR), which reflects the cost at which banks raise funds. The one-year MCLR for the State Bank of India, the country's top lender, remains steady at 9%, the highest since the RBI began raising rates.

Challenges in Reducing Deposit Rates

With year-end demand for funds and rising global yields, the reaction of money markets to the RBI's liquidity infusion has been muted. Banks are hesitant to lower interest rates on term deposits, as credit growth continues to outpace deposit growth. Since the RBI's repo rate cut, no major bank has reduced its deposit rate, with only some small finance banks adjusting their rates in response to sector stress.

RBI's Forex Reserves and Liquidity Management

Even as the RBI injects record liquidity into the banking system, it continues to drain rupees by selling dollars from its forex reserves. This strategy has helped stabilize the system and address immediate liquidity shortages, but it has not yet fully succeeded in reducing short-term interest rates due to ongoing liquidity deficits and economic uncertainties.

Future Outlook

Bankers anticipate a decline in the cost of funds in the first quarter of FY26, as the year-end pressure to lend eases. The RBI's measures have provided some relief, but the full impact on reducing borrowing costs remains to be seen.