Key Highlights
- Liquidity Injection: RBI to infuse ₹1.87 trillion into the banking system to ease financial year-end liquidity constraints.
- Policy Transmission Focus: Despite a 25 bps repo rate cut in February, tight liquidity has kept interest rates elevated in some segments.
- Open Market Operations (OMO): RBI will purchase ₹1 trillion in government securities in two ₹50,000 crore tranches on March 12 and March 18.
- USD/INR Swap Auction: A $10 billion buy-sell swap with a 36-month tenor announced to manage forex liquidity.
Current Liquidity Situation
- Banking system liquidity was in a deficit of ₹55,000 crore as of March 6.
- Deficit persisted for 11 consecutive weeks, despite previous RBI measures:
- ₹60,000 crore OMOs
- $5 billion and $10 billion forex swaps in Jan-Feb
- Liquidity swung from a ₹1.35 trillion surplus in Nov 2024 to a ₹2.07 trillion deficit in Jan 2025, improving to ₹1.59 trillion deficit in Feb 2025.
Market Reactions & Expert Views
- Nomura Report: RBI’s actions suggest a proactive approach to shift the system into surplus, ensuring effective policy transmission.
- Harsh Dugar (Federal Bank ED): Banks may lower deposit rates, improving lending rate transmission.
- Treasury Head (Private Bank): RBI aims to stabilize short-term rates ahead of major outflows.
- Radhika Rao (DBS Bank): Measures reflect an accommodative stance, boosting market confidence.
- Suyash Choudhary (Bandhan Mutual Fund):
- Underlying liquidity conditions have not been conducive for rate transmission.
- These measures signal RBI’s intent to sustainably move liquidity into surplus.
Potential Impact
- Lower Deposit Rates: With improved liquidity, banks might cut deposit rates, easing funding costs.
- Bond Market Relief: Corporate bond spreads and state government security yields could stabilize.
- Forex Market Stability: Active RBI intervention in forex markets may ease rupee depreciation concerns.
- Policy Transmission Boost: Lending rates, especially marginal cost of funds-based lending rate (MCLR) loans, could see better transmission.
Upcoming OMO Auction – March 12
RBI will buy ₹50,000 crore worth of government securities, including:
- 7.10% GS 2029
- 7.18% GS 2033
- 7.10% GS 2034
- 7.40% GS 2035
- 7.41% GS 2036
- 7.23% GS 2039
The RBI’s liquidity measures are larger than market expectations and could shift the banking system to surplus, ensuring better monetary policy transmission and stabilizing short-term rates.
Source: BS
