RBI’s additional liquidity support to wind down after March, bankers say

MUMBAI: The Indian central bank’s additional liquidity support to ​lenders, which has pushed overnight rates ​towards the floor of the policy rate corridor in a bid ​to ease money market stress and improve transmission, is unlikely to extend beyond March, according to bankers.

Market participants say the liquidity push reflects an interim calibration, with the central bank aiming to ease short-term ‌rates.
India’s banking system ⁠liquidity ⁠surplus has averaged around 1.1% of deposits this month, inching past the 1% threshold that the Reserve Bank ​of India indicated in December.

This has dragged the weighted average call rate to about 5%, below ​the policy repo rate of 5.25% and near the floor of the policy rate corridor. The secured overnight borrowing rate slipped to around 4.80% this month, highlighting the extent ​of cash surplus.

The liquidity injections “were in response to funding pressures that ⁠were building ‌up…the usual channels of transmission were not proving effective,” a person ​familiar with the ​RBI’s thinking said, declining to be identified as they are not ⁠authorised to speak publicly.
The RBI did not respond to an ​email seeking comment.
In January, rates on India’s short-term corporate ​and bank borrowings rose to more than 10-month highs, signaling funding pressures. After the liquidity injections, the rates have fallen by 15-30 basis points. The one-month overnight index swap rate dropped by up to 16 bps.
“The RBI’s stealth easing has been particularly effective.. with its immediate objective of alleviating funding pressures met, we expect them to maintain the current ‌approach till March,” said Mandar Pitale, head of treasury at SBM Bank (India).

TEMPORARY RELIEF

Bankers say the excess cash is not a strategic shift in ​the RBI’s liquidity management ​and that the ⁠central bank is likely to absorb part of the surplus through variable rate reverse repos after March, a tool that has not been used since early December.

Liquidity conditions typically become volatile ​in March, the last month of the fiscal year, due to tax payments, balance-sheet needs of banks, and uneven government spending.

Allowing the call rate to consistently remain below the repo rate “is not likely to extend in FY27 as that would imply a deviation from (the RBI’s) liquidity management framework,” Gaura Sen Gupta, chief economist at IDFC First Bank, said.