RBI signals intent to ensure banking liquidity surplus, analysts say

Indian central bank's latest bond purchase and FX swaps underscore its intention to keep banking system liquidity in a surplus, which should help banks to pass on policy rate cuts to consumers, analysts said. Comfortable liquidity positions would also lead to a steepening in the yield curve, which will be beneficial for the money market as well as corporate debt instruments, analysts added.

India's banking system liquidity has remained in deficit since mid-December, and the heavy fund infusion indicates the RBI is not comfortable with the deficit as it has embarked on a rate-cutting cycle. Market participants say comfortable liquidity conditions are a prerequisite for effective monetary policy transmission and would aid growth.

The RBI will conduct open market bond purchases worth 1 trillion rupees ($11.49 billion) over the next two weeks, followed by $10 billion of a three-year FX swap. These measures are the latest tool in the central bank's effort to boost rupee liquidity, which had drained over last few months due to heavy FX intervention.


Indian benchmark 2034 bond yield eased two basis points to 6.68% on Thursday, while other bond yields also eased after the announcement. The one-year dollar-rupee forward premium declined about 14 basis points.

"The recent measures show the RBI's bias towards ensuring adequate liquidity in order to align with the rate-cutting cycle," Kanika Pasricha, chief economic advisor at Union Bank of India.

"The RBI has been forthcoming in announcing measures, which suggests the RBI could want the system to move into a surplus rather than remaining in deficit," Nomura Asia rates strategist Nathan Sribalasundaram said.

The market should start pricing the weighted average call rate to trade with a small premium of about 5 bps over the repo rate before converging and/or falling below it, after the RBI dividend in May, Sribalasundaram added.