The Reserve Bank of India (RBI) is set to reduce its liquidity support after injecting approximately ₹8.57 trillion ($100.06 billion) into the banking system since December 2024. This decision comes ahead of an anticipated substantial surplus transfer to the government, estimated between ₹2.5 trillion and ₹4 trillion by various economists and financial institutions.
💰 RBI’s Liquidity Measures
Over the past six months, the RBI has implemented several measures to infuse liquidity into the banking system:
- Cash Reserve Ratio (CRR) Cuts: Reducing the CRR to free up funds for banks.
- Open Market Operations (OMOs): Purchasing government securities to inject liquidity.
- Forex Swaps: Conducting dollar/rupee swap auctions to provide durable rupee liquidity.
These actions have led to a significant increase in core liquidity levels, which might exceed ₹5 trillion, reducing the need for further durable liquidity injections until around September.
📉 Impact on Bond Markets
The RBI’s liquidity infusion has influenced the bond markets:
- Yield Movements: Bond market yields have declined significantly, especially for shorter-term bonds.
- Market Expectations: Investors anticipate a pause in the recent price rally, with yields expected to stabilize.
The central bank’s decision to slow liquidity support is seen as a move to balance economic growth with financial stability.
🏦 Banks Seek Regulatory Easing
Indian lenders have requested the RBI to consider:
- Overnight Liquidity Operations: Reinstating fixed-rate overnight instruments tied to deposit base percentages.
- CRR Maintenance: Easing the daily maintenance requirement of the CRR, currently at 90%, to potentially 70%-85%.
These proposals aim to provide more stable funding, enhance lending capacity, and support economic growth. Reuters
🔮 Future Outlook
The RBI is expected to announce the surplus transfer before the end of May. This transfer, coupled with the government’s increased spending, is anticipated to release sufficient funds into the financial system, reducing the need for further RBI support through OMOs in the near term.
