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Informist, Monday, Oct. 27, 2025

 

NEW DELHI – The liquidity hole created by the Reserve Bank of India's dollar sales to support the rupee may need to be filled by up to INR 3.5 trillion of government bond purchases through open market operations in Jan-Mar if India and the US do not agree to a trade deal, QuantEco Research said in a note Monday. The purchases may be as low as INR 500 billion if the India-US trade deal is finalised by November as the pressure on the rupee may ease if the US reduces the current 50% tariff rate on India's exports to the world's largest economy.

 

QuantEco sees core liquidity falling into a deficit of 0.4% of banks' net demand and time liabilities by March if India and the US are not able to negotiate a trade deal and the RBI doesn't buy bonds in the open market. This would be a sharp decline from the 2.0% surplus at the end of September and may lead to the RBI sterilising its foreign exchange activity with significant bond purchases, the note said.

 

"The pace of drawdown in RBI's FCA (foreign currency assets) has increased since August, coinciding with the imposition of the 50% tariff by the US," the research firm, headed by former YES Bank Chief Economist Shubhada Rao, said. "With the punitive tariff on India imparting an idiosyncratic downside to the INR, the drawdown in RBI's FCA reflects its FX intervention to smooth volatility."

 

However, the pressure on the rupee will sharply decline if the two nations announce a trade deal by November, as indicated by media reports, QuantEco said. This will only lead to a drawdown in the core liquidity surplus to 0.9% by March-end, which would necessitate a much smaller quantum of open market operations to buy bonds, the note said.

 

The RBI's foreign currency assets have been on a steady decline, falling to $570.41 billion as on Oct. 17 from $594.82 billion on Jun. 27, latest central bank data showed. Meanwhile, the durable or "core" liquidity has fallen to INR 3.86 trillion as on Oct. 3 from INR 5.80 trillion as on Jun. 27. The central bank had injected INR 9.5 trillion of durable rupee liquidity into the banking system between January and the start of June through long-term dollar-rupee buy/sell swaps, long-term repo operations and open market purchases, RBI Governor Sanjay Malhotra said. Another INR 3.66 trillion of durable liquidity will be freed up for banks by cash reserve ratio cuts in December 2024 and Sept-Nov this year.

 

The RBI has abstained from OMO auctions since May 19, after purchasing gilts worth over INR 5.2 trillion since January. It has conducted sporadic and minuscule OMO buys in the secondary market worth INR 100 million each in the weeks ending Sept 26 and Jun. 20.  End

 

US$1 = INR 88.24

 

Reported by Aaryan Khanna

Edited by Ashish Shirke

 

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