Reserve Bank of India’s (RBI) massive liquidity infusion has fuelled expectations of a repo rate cut on Wednesday.
The RBI has injected nearly Rs 7 lakh crore into the banking system through a host of measures, including bond purchases, forex swaps and variable rate repo (VRR) auctions, which analysts view as potential signals of an imminent repo rate cut of 25 basis points.
Out of the total Rs 7 lakh-crore liquidity support, the RBI announced on April 1 that it would inject Rs 80,000 crore through OMO purchase auctions, to be conducted in four tranches.
“At a recent meeting between RBI officials and bankers, lenders emphasised that effective transmission of rate cuts hinges on adequate liquidity support,” said a senior official of a public sector bank.
The review meeting of the monetary policy committee (MPC) of the RBI started on Monday and the policy decision will be announced on Wednesday.
Despite a 25-basis-point reduction in the repo rate in February, banks did not significantly pass it on to borrowers due to a high liquidity deficit. Bankers said tight liquidity kept their cost of funds elevated, making it difficult to transmit the rate cut to customers.
The weighted average call rate (WACR) was at 6.16% on March 27 and eased to 5.99% on April 3 after liquidity turned surplus. Banking sector liquidity was at a surplus of Rs 2.2 lakh crore on April 3, compared with a deficit of Rs 1.3 lakh crore on March 27.
“RBI’s initiatives, including open market operations, forex swaps and VRR auctions, reflect a clear commitment to facilitating effective monetary policy transmission while pursuing its rate-easing trajectory,” said chief economist of a public sector bank. “Given the subdued growth outlook for this financial year amid global challenges, we expect a 25-basis-point repo rate reduction in April, alongside a shift in the monetary policy stance to accommodative.”
The apex bank conducted the second tranche of OMO purchase auction on Tuesday for which it received a strong response. Banks placed bids worth over Rs 70,144 crore, against the notified amount of Rs 20,000 crore. The RBI announced an OMO purchase of Rs 80,000 crore in four tranches of Rs 20,000 crore each, scheduled for April 3, April 8, April 22 and April 29 as part of its effort to inject durable liquidity into the system.
The RBI introduced several measures, including lowering the cash reserve ratio, daily variable rate repo, long-term repo auction, forex swaps and OMO purchases, to ease liquidity stress. The central bank is conducting forex swaps and OMO purchase to inject durable liquidity while it is holding VRR auctions to infuse short-term cash in the banking system.