Market News

Bhaskar Dutta

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The liquidity shortfall, measured through lenders’ borrowings from the central bank, has eased to 793 billion rupees ($9 billion) as of March 6, from a nearly 15-year high of 3.3 trillion rupees in late January, a Bloomberg Economics index showed.

Much of the shrinkage was driven by the Reserve Bank of India as its measures since end-January will take the cash infusion to about $68 billion. Improving cash conditions will help in better transmission of interest-rate cuts and support the economy as it heads for its slowest expansion in four years.

“The RBI’s latest measures indicate that its focus is on making system liquidity positive to enable transmission of rate cuts,” said Gaura Sen Gupta, chief economist, IDFC First Bank Ltd. There will likely be a liquidity surplus by March-end, she said, adding the RBI has room to pump in 2 trillion rupees of cash in the fiscal year starting April 1.

India’s liquidity deficit widened partly due to dollar sales by the central bank to shield the rupee from global headwinds as the local currency hit successive lows. The banking system is now bracing for cash outflows due to quarterly advance tax payments by companies to the government before the financial year-end in March.

The measures taken by the RBI this year to provide cash to lenders include auction-based open market bond purchases, variable rate repurchase operations and foreign exchange swaps. It will buy more bonds this month and conduct a forex swap.

The cash infusions have helped bring banks’ overnight borrowing rate to below the policy rate in the last couple of days, while two-year government bond yields have eased. The overnight rate was almost 40 basis points above the RBI’s policy rate in early January.

The additional measures announced by the central bank this week were “far more in size” than market expectations, Suyash Choudhary, head of fixed income at Bandhan AMC Ltd., wrote in a note. This suggests that the RBI will inject more funds if liquidity conditions do not ease as expected, he said.