Liquidity push: RBI readies ₹1.5 lakh crore injection

Mumbai: The Reserve Bank of India (RBI) Monday announced a host of measures to inject durable liquidity into the system, including a ₹60,000-crore bond purchase, a 56-day variable repo rate auction of ₹50,000 crore, and a $5-billion USD/rupee buy/sell swap auction for a six-month tenure.

Economists believe these steps increase the probability of a rate reduction in February.

These measures are estimated to collectively inject ₹1.5 lakh crore in a phased manner into the banking system, which witnessed a peak gap at ₹3.15 lakh crore on January 23, and has faced an average daily deficit of ₹1.96 lakh crore through this month.


"The RBI will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions," said a central bank statement announcing the measures.

Yields on 10-year government bonds, which touched a three-year low on Monday at 6.64%, are expected to ease further to the 6.60% level in the next few days.

RBI Action Last Week
The RBI's concerted action follows the net purchase of Rs 10,175 crore of bonds in the secondary market in the week ended January 17, data published by the central bank last Friday showed. The market estimates the RBI likely purchased another Rs 10,000 crore of bonds in the week ending January 24.

Treasury heads and economists say the measures to ease liquidity in the system would pave the way for a repo rate cut. The RBI's rate-setting committee will meet between February 5 and 7.

"The RBI measure shows a preference for tools other than the cash reserve ratio (CRR) to inject durable liquidity, and so we no longer expect a CRR cut in the upcoming policy," said Anubhuti Sahay, head of India economic research, Standard Chartered Bank.

She expects the RBI to buy more bonds to inject durable liquidity, and has advanced the projection of two 25 basis point repo rate cuts to February and April, respectively, from April and June earlier.

One basis point is a hundredth of a percentage point.

Liquidity & Rates
At a recent meeting with the RBI, treasury heads suggested a policy rate cut without liquidity infusion would not be effective in transmitting rates.

Treasury heads and economists estimated the liquidity deficit to peak to Rs 4 lakh crore by the end of March, partly due to advance tax outflows, if the RBI did not act.

"We expect more easing will be needed given the continued pressure over the next few months," said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank. "The liquidity easing measures also increases the probability of a repo rate cut in the upcoming February policy."

After the market closing hours, the RBI announced three bond purchases auctions under the open market operations (OMO) of Rs 20,000 crore each on January 30, February 13, and February 20. It will hold a 56-day VRR auction on February 7 for Rs 50000 crore, while the USD/Rupee buy/sell swap auction of USD 5 bn for the tenor of six months will be held on January 31.

"This is probably one of the ways the RBI could indirectly cut rates with easy liquidity, without actually cutting rates," Madhavi Arora, lead economist, Emkay Global, told ET. "With these measures, I think positions will be comfortable for the next two months."

Similarly, economists had made a case for the RBI to infuse liquidity and refrain from selling dollars to support the rupee.

"The core liquidity deficit stood around Rs 53,000 crore as on January 17 and could rise to Rs 1-1.5 lakh crore by the fiscal year-end only due to currency leakage. (There are) other factors also at play, such as foreign-exchange outflows, which totalled Rs 5 lakh crore since end-September," Kanika Pasrisha, chief economic advisor, Union Bank of India told ET.