By Dharamraj Dhutia MUMBAI, – The Reserve Bank of India’s (RBI) unexpected move to buy 800 billion rupees ($9.34 billion) of bonds this month is expected to lift the banking system’s liquidity further, giving the market more certainty around cash conditions. The announcement of the open market operations (OMO), to be done in four equal tranches in April, was made late on Tuesday.
WHY IT’S IMPORTANT: While India’s banking system liquidity hit an over four-month peak on Tuesday, that came after having remained in deficit since mid December. With the central bank starting its rate-easing cycle earlier this year and widely expected to lower rates again next week, market participants have argued for the need of a surplus. Comfortable liquidity conditions are a pre-requisite for effective monetary policy transmission and critical for boosting growth, they said.
CONTEXT: The banking system’s liquidity deficit widened to a one-year high in January, largely due to the RBI’s foreign exchange intervention and unpredictable government spending patterns. This forced lenders to rely on market borrowings to meet funding needs and drove interbank call money rates towards the upper end of the RBI’s policy corridor.
KEY QUOTES “The OMO shows that the focus is on making system liquidity a significant surplus to ensure transmission of rate cuts,” said Gaura Sen Gupta, India economist at IDFC FIRST Bank. “We expect further liquidity infusion in FY26 to make system liquidity surplus at around 2 trillion rupees on a consistent basis.” “We believe durable liquidity infusion measures are here to stay,” said Aastha Gudwani, India Chief Economist at Barclays. Gudwani said the infusion could be via OMO purchases and additional FX swaps or other operations as needed, but no longer sees the need for a cash reserve ratio cut this fiscal year.
GRAPHIC BY THE NUMBERS The RBI injected around 6.20 trillion rupees in the banking system in December-March. Tools Period Quantum of funds infused in billion rupees CRR cut December 1160 Secondary market bond buys January 388.25 OMO purchases Jan-March 2445.41 6-month FX swap February ~440 3-year FX swap March ~870 3-year FX swap March ~860 ($1 = 85.6540 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Sumana Nandy)
