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Informist, Wednesday, Apr. 2, 2025

MUMBAI – The Reserve Bank of India's constant liquidity infusion in the March quarter and the government's robust year-end spending have pushed the banking system liquidity to surplus for the first time in over three months. Call money market traders said this is a sign of things to come in 2025-26 (Apr-Mar) when easy liquidity is likely to be a priority for the central bank as inflation eases.

The liquidity in the banking system moved to surplus on Saturday for the first time since Dec. 15 and has been rising since. The net liquidity absorbed by the RBI – a proxy for the system liquidity – rose to INR 1.42 trillion on Tuesday, the most since Nov. 18. Systemic liquidity tightness had persisted over the last few months despite the central bank's Monetary Policy Committee signalling monetary conditions easing with a 25-basis-point repo rate cut in February.

"The RBI has to make the bucket overflow. It can't drive through rate cuts and support growth by withholding liquidity from the system," a dealer at a primary dealership said. "Right now it has only filled the bucket, and its next measures into April and beyond will need to show how much of an overflow it wants."

The net liquidity infused by RBI – a proxy for a liquidity deficit – averaged 1.40 trillion in March. Through the month, outflows of around INR 4.00 trillion – INR 5.00 trillion took place for goods and services tax, advance tax and excise duty payments, dealers said. However, the RBI's durable and transient liquidity measures and the government's higher-than-expected spending at month-end ensured comfort on systemic liquidity, they said.

"The sharp jump in liquidity is due to month-end spending. The inflows for month-end spending was higher than what was expected by the market because the government had to meet its target," a dealer at a private bank said. "Foreign exchange interventions and other liquidity measures conducted by RBI also helped in easing pressure of prior outflows."
 

Since late January, the central bank has purchased gilts worth INR 2.8 trillion via open market operation auctions and secondary market purchases. The central bank announced on Tuesday that it will purchase gilts worth INR 800 billion through open market auctions in April, starting with an auction for INR 200 billion on Thursday.  

The RBI also infused liquidity through different dollar/rupee buy/sell swap auctions for a total of $25.20 billion. Also, in December, the RBI cut the cash reserve ratio of banks by 50 basis points to 4% of net demand and time liabilities, releasing about INR 1.16 trillion into the banking system. 

The central bank also conducted three long-term variable rate repo auctions of 45-day, 49-day, and 56-day tenures in February, infusing a total of INR 1.83 trillion of liquidity. With the three long-term variable rate repos set to reverse in the next few days, traders said the surplus may fall over the next week before being replenished by the RBI's government bond purchases. 

Other than these, there were inflows of around INR 2.00 trillion to INR 2.50 trillion from government spending in the last week of March, traders said.

The easing liquidity of conditions has resulted in cheaper borrowing rates and a sharp fall in the yields of fixed-income assets. While the weighted average call rate was at 6.19% Wednesday, the weighted average triparty repo rate was at 5.75%, sharply below the standing deposit facility rate of 6.00%. The yield on the 91-day treasury bills fell 22 bps on week to 6.30% on Wednesday, while the 10-year gilt yield fell 12 bps to 6.48% during the same period.

Market participants speculated that the liquidity easing measures may be hinting at the RBI opting for a rate cut in its next monetary policy meeting in April, as well as a change in policy stance to 'accommodative'.

"The RBI's aggressive liquidity easing measures suggest a strong intent on ensuring smooth monetary transmission as it continues on its rate easing path... we continue to expect 25 bps of rate cuts each in the April and June policies, accompanied by a stance change to accommodative. While global risks remain, we see room for an additional 25-50 bps of rate cuts if growth slowdown persists," Kotak Securities said in a note. 

End

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

Reported by Kabir Sharma and Siddhi Chauhan

With inputs from Aaryan Khanna

Edited by Saji George Titus

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