The Reserve Bank of India’s (RBI) recent policy announced a various liquidity measures, including bond purchases through open market operations (OMO) and forex swaps, to support the banking system. The central bank has frontloaded the measures in December, likely considering heavy outflows during the month, according to market participants.
Most economists believe that this is enough for the month. Though market welcomed these measures, they expect an additional liquidity injection worth Rs 1.5 lakh crore in the fourth quarter – a quarter with a substantial currency leakage – to ensure smooth transmission of the rate cut and offset the impact from the possible FX intervention.
What did Anitha Rangan say?
“The fourth quarter marks a high credit season and with banks already facing deposit growth constraints, the RBI should infuse more liquidity—beyond Rs 1.5 lakh crore to accelerate rate cut transmission,” said Anitha Rangan, chief economist, RBL Bank.
“The RBI is likely to step up liquidity injections next quarter. If the tariff overhang stays unresolved and both the current and capital accounts fail to improve meaningfully, the system may need over Rs 1 lakh crore—especially as RBI’s FX operations continue to drain liquidity,” said Soumyajit Niyogi, director-India Ratings & Research.
What do other economists say?
According to Sreejith Balasubramanian, economist at Bandhan Mutual Fund, the RBI is expected to infuse another Rs 1 lakh crore of durable liquidity through OMO purchases, beyond the December measures already announced. “This should help in the endeavour to keep core liquidity adequate and thus aid transmission of monetary policy,” he said.
The system liquidity averaged to Rs 1.78 lakh crore in November compared to Rs 3.04 lakh crore in July. As on December 7, the system liquidity stood at Rs 2.15 lakh crore.
Along with a 25-bps rate cut, the RBI announced liquidity measures worth Rs 1.5 lakh crore including bond purchases of Rs 1 lakh crore through open market operations (OMO) and a three-year USD/INR Buy Sell swap of $ 5 billion. The two tranches of OMOs will happen on December 11 and December 18, while FX swap will be held on December 16. The timing of these operations aligns with the advance tax and GST outflows, which is expected to be around Rs 2.5 lakh crore – Rs 3 lakh crore.
OMOs, while meant to add durable liquidity rather than steer the bond market, will give yields a lift, said Niyogi. With Rs 1.5 lakh crore already announced and another Rs 1 lakh crore expected in Q4, 10-year yields could drift towards 6.30–6.20%, he added.