The Reserve Bank of India (RBI) is taking steps to address liquidity constraints within the banking system, as the ongoing 2024 national elections, spanning over six weeks, have led to a slowdown in government spending despite robust tax collections.
With voting commencing on April 19 and concluding on June 1, and counting scheduled for June 4, government expenditure typically slows during election periods and tends to accelerate only after a new government is formed and a budget is presented.
Given the interim budget and the election season, the government’s expenditure has been lower than usual. In the April-June 2023 period, government spending totaled Rs 2.78 lakh crore, compared to Rs 1.75 lakh crore during the same period a year earlier. This year, spending during April-June is expected to be significantly reduced due to the elections, analysts suggest.
Surprise buyback
To address liquidity challenges, the RBI has intensified short-term liquidity infusions, injecting a total of Rs 1.7 lakh crore through variable rate repo auctions since mid-April.
In a recent move, the government announced a surprise buyback of bonds worth Rs 40,000 crore, aimed at infusing funds into the banking system. This buyback has resulted in a decline of 3-5 basis points in yields on bonds maturing in 2-5 years, contributing to a cooling of longer-term yields as well.
The buyback of securities serves as a liquidity injection tool and is expected to alleviate liquidity pressures within the system.
Banking system liquidity has been in deficit since April 20 and is anticipated to remain in deficit or near-neutral levels throughout this month.
Citing potential election-related delays in government decision-making and spending, analysts believe the RBI’s proactive liquidity measures are aimed at mitigating further tightness in liquidity across the banking sector.
The transfer of RBI’s dividend to the government is expected in May; however, spending may be delayed due to ongoing election-related factors.
