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Informist, Friday, Jan. 10, 2025

 

NEW DELHI – Economists are calling on the Reserve Bank of India to ease liquidity conditions sharply, with purchase of government bonds through open market operations increasingly being suggested as the way forward.

 

As the central bank warned last month, liquidity conditions have tightened sharply in recent weeks. On Thursday, the RBI injected a net INR 2.01 trillion, compared with INR 511.23 billion being absorbed on Dec. 1, with a combination of outflows due to tax payments and the central bank's interventions in the foreign exchange market to stabilise the exchange rate draining rupee liquidity from the banking system. According to Nomura analysts, total liquidity in the Indian banking system has dropped from INR 4.6 trillion as of Sept. 27 to INR 0.4 trillion on Dec. 27. This has "likely fallen further since", said Nathan Sribalasundaram, Nomura's Southeast Asia and India Rates Strategist, in a note Friday.

 

At 1210 IST, the weighted average call rate was 7.02%, with the weighted average tri-party repo rate at 6.75%, both well above the repo rate of 6.50%.

 

While the RBI has been conducting regular variable rate repo operations and last month cut the Cash Reserve Ratio by 50 basis points to the pre-pandemic level of 4.00% in two steps, economists say the measures are "falling short of providing for the liquidity needs of the market". According to Nomura's Sribalasundaram, open market purchases are "becoming more likely". In the week ended Dec. 27, the RBI bought INR 200 million worth of bonds through its screen-based open market operations--the first time it had done so since the week ended Jul. 19.

 

Meanwhile, QuantEco Research's economists think liquidity conditions are now an "immediate policy priority" for the RBI. They expect the central bank to conduct OMO purchases to the tune of INR 3.00 trillion starting this month and until the end of 2025-26 (Apr-Mar).

 

Similarly, Standard Chartered Bank has said liquidity management will now be prioritised over interest rate cuts. The bank said in a note Thursday that it was pushing back its first rate cut expectation to April from February as "the RBI is likely to focus more on providing INR liquidity than implementing repo rate cuts, as banking-system liquidity has tightened on continued USD outflows and FX intervention". Instead of a repo rate cut, Standard Chartered Bank now expects another 50 bps reduction in the CRR next month.

 

"We think the RBI will have to consider more structural liquidity injection measures, such as a further reduction in the CRR and/or open-market operation purchases of Indian Government Bonds to prevent a significant tightening of interbank liquidity conditions," Standard Chartered Bank economists said, adding that they see durable liquidity deficit in the range of INR 980 billion to INR 1.60 trillion for the rest of FY25. Such a situation, they said, would be in "conflict with the RBI's current neutral monetary policy stance".

 

Nomura's Sribalasundaram also made note of the looming exit of RBI Deputy Governor Michael Patra, who handles the monetary policy and financial markets operations departments.

 

"...there has been a lot of speculation on the replacement of Deputy Governor Patra, as his term will end next week. We will closely watch RBI actions next week for any hint of a change in strategy," Sribalasundaram said.  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Siddharth Upasani

Edited by Akul Nishant Akhoury

 

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