
Faced with rising liquidity crunch which has crossed Rs 3 trillion mark many times in the recent weeks, the Reserve Bank has announced a slew of liquidity infusing measures, including a hefty Rs 60,000 crore of open market operation of purchasing government securities in three tranches, and holding a 56-day variable rate repo auction for Rs 50,000 crore among others which together will release Rs 1.5 trillion of lendable funds to banks.
Another key measure announced by the apex bank on Monday evening include dollar/rupee swaps worth $5 billion and these come after it had announced daily variable repo auctions two weeks ago through which it had infused a whopping Rs 3.17 trillion so far into the system.
These measures, the details of the measures to be announced later, are expected to collectively infuse Rs 1.5 trillion into the banking system, which come after months of severe cash crunch that had pushed up overnight and short-term rates.
System wide liquidity deficit widened to a one-year peak in the previous fortnight. The daily average banking system liquidity deficit jumped to Rs 2.39 trillion in the fortnight to January 24, as per latest RBI data.
The Reserve Bank will buy government bonds worth Rs 60,000 crore in three tranches and conduct a 56-day variable rate repo auction worth Rs 50,000 crore on February 7.
The OMO purchase auctions of Gilts for aggregate amount of ₹60,000 crore in three tranches of ₹20,000 crore each to be held on January 30, February 13 and 20.
The central bank will also conduct a dollar/rupee buy/sell swap auction worth $5 billion for a tenor of six months on January 31, the RBI said.
The RBI "will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions," the central bank said.
It can be noted that the new governor Sanjay Malhotra has met economists last week and bankers today in the run up to his first monetary policy announcement in the first week of February and the consensus emerged from a both the meetings was that the central bank has to ensure adequate liquidity in the system and let the rupee, which has been bleeding since October and only got aggravated under his watch, find its own feet.
The central bank has sold more than $130 billion from its forex reserves to defend the rupee since October yet the unit lost more and had sniffed at 87 to a dollar in mid January from 83.75 in the first week of October.
Analysts and traders are reading the development as the strongest signal yet to a rate cut on February 7 when the next monetary policy will be unveiled. Since February, 2023, the repo rate was left unchanged at 6.5 percent.
The urgency that was being felt in the market has been addressed by the RBI through these steps," A Prasanna, head of research at ICICI Securities, said ina note.
“I think a rate cut would be the next logical action and the announcements signal that the central bank is more confident about inflation management” he added.
Treasury officials, who had met the central bank three weeks ago, had suggested longer-term repos, forex swaps and bond purchases to bridge the cash deficit in the banking system.
But many doubt whether OMOs, which though are a standard tool to infuse primary liquidity, will be effective in the current context that is constrained by the structural and regulatory challenges.
Because OMOs will be effective if only banks decide to tender their surplus government securities to RBI. And in the current context wherein banks operating close to their minimum liquidity coverage ratio requirements, they don’t have the flexibility to participate in OMOs effectively.
However, for institutional investors like insurers and provident funds, OMOs allow them to tender bonds to the RBI in exchange for cash. However, this liquidity infusion has limited direct impact on the banking system unless bondholders convert their holdings into bank deposits. Consequently, OMOs often result in a sharp fall in government bond yields without a proportional liquidity boost for banks.