The Reserve Bank of India (RBI) is expected to extend its record cash infusions into the banking system in order to shield the economy from mounting global headwinds, a Bloomberg report stated citing analysts. The central bank is expected to inject as much as Rs 4 trillion ($47 billion) through bond purchases and foreign-exchange swaps in the current fiscal year, IDFC First Bank said. Meanwhile, the Bloomberg report said that SBM India has projected that as much as Rs 2 trillion could be infused in the first half of the year, on top of a record $80 billion already injected since January.
Enhancing liquidity is crucial to ensure that interest rate cuts are effectively passed on, especially as challenges like the new US tariff policy threaten Indian exports. The central bank is anticipated to cut the repo rate again on April 9, following its first cut in five years this February. “In the past rate-cutting cycles, liquidity was in surplus of at least Rs 2 trillion for transmission to take place,” Gaura Sen Gupta, chief economist at IDFC FIRST Bank, told Bloomberg.
Meanwhile, the RBI is expected to maintain a surplus in the banking system, as upcoming net maturities of around $35 billion in the forwards market between April and June could potentially trigger a cash shortfall. If the RBI opts not to roll over the swaps at maturity, it will need to return the dollars.
“RBI’s short forwards position is expected to continue the need for rollovers or outright FX swaps or additional open-market purchases to keep liquidity in surplus,” said Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank Ltd.
Last week, the RBI announced another Rs 80,000 crore of purchases for April, providing further tailwinds to bonds. The 10-year yield fell to 6.46 per cent on Friday, the lowest since Jan 2022. Meanwhile, Nomura predicted a further drop to 6.25 per cent in the coming months.