MUMBAI: After injecting over Rs8.57 lakh crore (around $100 billion) into the banking system since December, the Reserve Bank of India (RBI) is expected to slow down its liquidity support in the coming weeks.
A large surplus transfer by RBI to the government in the form of dividend is expected soon, which could itself infuse substantial liquidity into the system.
The RBI concluded its last scheduled open market bond purchase on Monday and has not announced any new operations, indicating a possible pause.
“With the upcoming dividend payout and subsequent government spending, there may be no need to infuse more liquidity through OMOs,” said Sandeep Bagla, CEO of Trust Mutual Fund.
Estimates for the upcoming dividend vary, with economists and market experts projecting a transfer between Rs 2.5 lakh crore and Rs3 lakh crore, while Citi expects it could be as high as Rs4 lakh crore.
The central bank has used multiple tools to manage liquidity in recent months:
How RBI injects liquidity
It reduced the cash reserve ratio (CRR), freeing up funds for banks.
It conducted open market operations (OMOs) purchasing bonds to inject cash.
It used foreign exchange swaps, injecting rupees into the system by buying dollars with a future commitment to sell them back.
“With the dividend transfer, core liquidity in the banking system could exceed Rs5 lakh crore – a very high surplus. The RBI may not need to inject durable liquidity for the next three months and could consider OMOs again from September,” said A Prasanna, Head of Research at ICICI Securities Primary Dealership.
Meanwhile, bond market participants expect yields to stabilise after a sharp rally in recent months. The 10-year benchmark bond yield has dropped 38 basis points since April, while the 5-year yield has fallen 57 basis points.
“We don’t expect any more OMO announcements this month. With the terminal repo rate seen at 5.50 per cent, the 10-year bond yield could settle around 6.15 to 6.20 per cent,” said VRC Reddy, Treasury Head at Karur Vysya Bank.
