RBI announces steps to inject Rs 1.5L crore liquidity

MUMBAI: RBI on Monday announced measures to inject over Rs 1.5 lakh crore into money markets, marking the largest monetary easing since the pandemic. These steps aim to address the liquidity shortfall caused by the central bank’s intervention in selling dollars to stabilise the rupee.
RBI is estimated to have sold over $50 billion from its forex reserves as foreign institutional investors sold stocks. This intervention had led to tighter short-term interest rates and increased borrowing costs. Some market participants view these actions as a precursor to a possible repo rate cut in Feb.
RBI’s liquidity infusion plan comprises three measures. First, it will conduct a govt bond buy-back worth Rs 60,000 crore in three tranches scheduled for Jan 30, Feb 13, and Feb 20, 2025. Second, the central bank will hold a long-term 56-day variable rate repo auction for Rs 50,000 crore on Feb 7. Finally, it will execute a US dollar-rupee buy/sell swap auction of $5 billion with a six-month tenure. This swap essentially involves RBI borrowing dollars in exchange for rupees, with the interest cost determined by the price at which it agrees to repurchase the dollars at the end of the term.
RBI governor Sanjay Malhotra recently met with private bank heads ahead of the upcoming monetary policy review in the first week of Feb. During the meeting, Malhotra emphasised the need to maintain financial stability, expand financial inclusion, improve digital literacy, and enhance access to affordable credit. He also urged banks to strengthen customer service, improve grievance redress mechanisms, and invest in technology.
Malhotra also expressed concern over the rising incidence of digital fraud and advised banks to implement robust and proactive systems to combat these threats. He stressed the importance of effective IT risk management and cybersecurity measures, calling for greater oversight of third-party service providers.
Market participants see RBI’s liquidity measures as laying the groundwork for a potential rate cut. Tight liquidity often prevents rate cuts from being fully transmitted to deposits and loans. Addressing the liquidity deficit will enable any future repo rate cut to be passed on to borrowers more effectively.
Bond dealers estimate the liquidity shortfall at approximately Rs 3 lakh crore. RBI assured the market that it would closely monitor evolving liquidity and market conditions, taking necessary measures to ensure orderly liquidity.