Context:
Industry experts expect short-term borrowing costs (like Certificates of Deposit and Commercial Paper rates) to ease as early as next month. The expected drop is due to multiple liquidity infusion measures by the Reserve Bank of India (RBI). Lower borrowing costs should eventually lead to softer lending rates.
Central Bank’s Liquidity Actions
- RBI’s stance appears to have shifted from neutral to accommodative.
- Key liquidity measures
- ₹4.1 lakh crore infused through Open Market Operations (OMO).
- ₹1 lakh crore more planned through two OMO auctions in March.
- $15.16 billion in dollar/rupee buy-sell swaps already auctioned.
- Additional $10 billion in buy/sell swaps announced for March 2025.
- The aggregate liquidity infusion via swaps could total around ₹2.15 lakh crore by the next quarter.
Impact on Rates
- The Weighted Average Call Rate (WACR) spiked to 6.81% in January, but fell to 6.21% by March 12.
- Three-month CD rates rose by 25-30 basis points in December, showing tightening liquidity.
- With these interventions, the banking system liquidity is expected to shift into surplus territory.
Additional Factors Adding to Liquidity
- RBI dividend transfers to the government are expected to further boost liquidity.
- Banks are also supported by existing Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) buffers.
Outlook
- Short-term rates are set to ease first, followed by gradual easing in broader lending rates.
- Rate cuts and surplus liquidity will be beneficial to borrowers and could lead to earlier-than-expected softening of bank lending rates.
- However, banks may see pressure on net interest margins (NIMs) in the short term.
