MUMBAI: India’s banking system is witnessing a sharp easing in liquidity crunch after the Reserve Bank of India (RBI) stepped in with aggressive cash injections. The weighted average call money rate – a key measure of overnight borrowing costs – has fallen from a peak of 6.88 per cent last month, aligning with the policy repo rate of 6.50 per cent.
The liquidity crunch, which had surged to nearly Rs3 trillion in late January, has significantly reduced, with the deficit dropping to Rs66,040 crore ($7.6 billion) as of February 4, according to Bloomberg Economics data. This marks a sharp improvement from Rs2.2 trillion recorded on January 30.
Market conditions had tightened due to the central bank’s dollar sales to stabilise the rupee, tax outflows, and increased cash withdrawals from banks. However, a combination of RBI’s interventions – such as open market bond purchases and forex swaps – along with an uptick in government spending has helped ease liquidity constraints, according to experts.
$7 bn injected
The central bank has so far injected over $7 billion of the planned $18 billion liquidity infusion. Analysts suggest that further measures may be needed as rupee volatility and upcoming tax outflows in March could put renewed pressure on liquidity.
“There is still a need for more liquidity support to address liquidity crunch since RBI’s forex interventions are draining cash from the system,” said Sakshi Gupta, economist at HDFC Bank.
Local swap rates have also reflected the shift, with the one-year rate dipping as much as 26 basis points below the RBI’s key policy rate. With liquidity conditions improving, market participants will be closely watching the central bank’s next move ahead of the upcoming monetary policy decision.
