By Dharamraj Dhutia
MUMBAI (Reuters) – India’s central bank will need to inject at least another 1 trillion rupees ($11.54 billion) into the banking system by March-end as durable liquidity remains in a deficit despite a recent cash infusion, market participants said on Friday.
“The need for durable liquidity infusion till March 2025 is estimated at around 1.2 trillion rupees to increase core liquidity from deficit zone to zero,” Gaura Sen Gupta, an economist at IDFC First Bank, said.
Since mid-January, the Reserve Bank of India has infused funds to counter a sharp decline in liquidity caused by its aggressive intervention in the foreign exchange market, among other factors.
The RBI also cut its key interest rate for the first time in nearly five years earlier this month, but market participants say sufficient liquidity is a must to ensure effective policy transmission by lenders.
India’s banking system liquidity deficit was around 1.7 trillion rupees, as on February 20.
The central bank could inject cash by opting for more open market bond purchases or boost non-resident Indian deposits, said Vivek Kumar, an economist at QuantEco Research.
The RBI has so far bought bonds worth 1.39 trillion rupees through open market and secondary purchases and infused around 440 billion rupees through a $5 billion dollar/rupee swap.
Despite regular fund infusions, the weighted average interbank call money rate has stayed comfortably above the RBI’s policy repo rate.
IDFC First Bank’s Sen Gupta expects the central bank to conduct 800 billion rupees of bond purchases and another $5 billion swap before the end of March.
The RBI has also infused 1.83 trillion rupees through long-term repos that will mature in early April.
It could roll over these repos for another two months as liquidity comes back into the system once it pays a dividend to the government by end-May, said Ketan Parikh, head of fixed income at ICICI Prudential Life Insurance.
List of actions by RBI Funds infused in
billion rupees
OMO purchase 1000.2
Secondary market bond purchase 388.15
FX swap Around 440
56-day repo 500.10
49-day repo 750.03
45-day repo 579.51
($1 = 86.6190 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Sonia Cheema)
