RBI Injects ₹80,000 Crore Liquidity Via OMO

The Reserve Bank of India (RBI) has announced an open market operation (OMO) purchase of ₹80,000 crore to inject liquidity into the banking system, ensuring effective transmission of policy rate cuts ahead of the April 7-9 Monetary Policy Committee (MPC) meeting.

Liquidity Boost

• OMO Purchase Plan:
  • RBI will purchase government securities in four tranches of ₹20,000 crore each on April 3, 8, 22, and 29.
• Liquidity Status:
  • Banking system liquidity turned surplus over the weekend for the first time in four months.
  • Net liquidity surplus reached ₹89,398 crore on Sunday.
  • Core liquidity surplus stood at ₹1.1 trillion as of March 21.

Rationale Behind RBI’s Liquidity Infusion

• Facilitating Rate Cut Transmission:
  • Surplus liquidity improves monetary policy transmission, ensuring that rate cuts effectively lower borrowing costs.
  • RBI aims to maintain a liquidity surplus of ₹1-2 trillion, which is necessary for smooth rate transmission.
• Government Spending Impact:
  • Increased government expenditure at the end of March contributed to the liquidity surplus.
  • Historically, spending spikes towards the financial year-end, adding liquidity into the banking system.
• Earlier Liquidity Measures:
  • Since January 2024, RBI has injected over ₹5 trillion through OMO auctions, dollar-rupee swap transactions, and repo auctions.
  • Another ₹1.8 trillion was infused through repos maturing in early April.

Impact on Policy & Lending Rates

• Possible Rate Cut in April MPC Meeting:
  • RBI expected to cut the repo rate by 25 basis points (bps) for the second consecutive time.
  • The last repo rate cut of 25 bps was in February 2024, following 11 consecutive meetings of unchanged rates.
• Limited Impact on Lending Rates So Far:
  • External benchmark-linked loans (EBLR) (tied to repo rate) have declined, reflecting past rate cuts.
  • However, marginal cost of funds-based lending rates (MCLR)—which impact corporate loans—have not fallen significantly.
  • Banks have not reduced deposit rates due to previous liquidity tightness.

RBI’s Policy Strategy

• Liquidity Injection Signals Continued Easing:
  • Economists suggest that RBI remains committed to maintaining a liquidity surplus, indicating support for further monetary easing.
• Market Expectations:
  • While an immediate change in RBI’s stance is unlikely, the central bank’s continued focus on liquidity infusion and rate cuts suggests a dovish policy stance in the coming months.

The RBI’s ₹80,000 crore liquidity infusion via OMOs signals proactive measures to support rate transmission and economic growth. While repo rate cuts have started affecting external benchmark loans, MCLR-based lending rates remain sticky. The April MPC meeting will be crucial in determining further monetary policy direction.

BS