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Informist, Tuesday, Mar. 4, 2025

 

NEW DELHI – The Reserve Bank of India must infuse an additional INR 1 trillion of liquidity in March to ensure the banking system's needs are just met, according to State Bank of India.

 

"System liquidity is still at a deficit of around INR 1.6 trillion (end-February) while average deficit is higher at around INR 1.95 trillion. We believe around INR 1 trillion more will be needed by March still to keep the systemic liquidity just in equilibrium mode," Soumya Kanti Ghosh, SBI's group chief economic adviser, said in a report Tuesday.

 

While liquidity conditions have improved somewhat in recent days--the net liquidity injected by the central bank on Monday was INR 1.10 trillion, down from INR 2.38 trillion on Feb. 23--thanks to the RBI's past measures and the Indian government's usual month-end spending, conditions are expected to tighten in the coming days due to advance tax payments due in mid-March and credit offtake at the end of the financial year.

 

To be sure, the RBI has infused massive amounts of funds through various instruments over the past three months to cancel out the hit to domestic rupee liquidity from its interventions in the foreign exchange market. Its Cash Reserve Ratio cut in December, long-term variable rate repos, open market purchases of gilts, and dollar/rupee buy/sell swap auctions have added as much as INR 5.7 trillion of durable liquidity, with further funds made available through its daily repo operations.

 

The RBI net sold INR 3.77 trillion of foreign currency in just Oct-Dec, as per available data, to defend the falling rupee. It also sold heavily in January and February, official data on which is awaited.

 

"On a (not so!) surprising note, despite rate cut, SGS (state government securities) and corporate bonds spreads over G-Secs (Indian government securities) have widened from 30-35 basis points (over G-Secs) to 45-50 bps... This has spilled over to corporate bond markets as well, hampering effective transmission of rate cut," SBI said in its report.

 

"We are of the opinion that there is a need to address this 'spread widening' and believe that open market operations may be considered in SGSs as well to smoothen/harmonise the spreads... With an unchanged ownership in G-sec in 2025-26 (Apr-Mar), OMO gap in FY26 could hover around INR 1.7 trillion. Thus, more liquidity measures could be required on a sustained basis... RBI could look into using CRR more as a regulatory intervention tool/countercyclical liquidity buffer rather than as a liquidity tool in future," it added.  End

 

US$1 = INR 87.38

 

Reported by Siddharth Upasani

Edited by Avishek Dutta

 

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