RBI’s $10 billion swap signals shift in liquidity strategy ahead of peak crunch in March, ET BFSI
The Reserve Bank of India (RBI) is about to conduct a $10 billion three-year greenback/rupee swap public sale on February 28, aiming to inject sturdy liquidity into the banking system scuffling with persistent money deficits.
The transfer displays a strategic shift in liquidity administration beneath the brand new RBI Governor Sanjay Malhotra, as short-term measures have failed to deal with the funding stress within the monetary system.
The swap is predicted so as to add roughly Rs 870 billion to the banking system by March 4, offering a extra sustained liquidity cushion in comparison with earlier short-term interventions. This follows a $5.1 billion six-month swap earlier within the yr, which, together with open-market bond purchases, has but to ease the continuing money pressure.
Market contributors anticipate that no less than Rs 1 trillion extra liquidity injection can be needed earlier than the monetary year-end to stop additional tightening.
A structural shift in RBI’s liquidity administration
The three-year tenor of the swap indicators the RBI’s intent to make sure sturdy liquidity within the system moderately than counting on shorter-term repo operations.
This might help simpler transmission of future fee cuts, an important issue after the central financial institution lowered the repo fee for the primary time in almost 5 years earlier this month. Nevertheless, with out adequate banking liquidity, additional fee cuts might not translate into decrease lending charges.
This method additionally hints at a shift within the RBI’s foreign exchange technique, with a possible improve in tolerance for rupee depreciation so long as it stays gradual and managed. To date, the RBI has infused over Rs 3.6 trillion into the system via open-market purchases, secondary debt market interventions, longer-duration repos, and FX swaps.
The newest swap might ease strain on short-term borrowing charges and result in a gentle steepening of the yield curve, benefiting shorter-duration authorities bonds.
Liquidity tightness poses a key problem
Regardless of these measures, the banking system stays in a liquidity deficit, which stood at roughly Rs 1.7 trillion as of February 20. Market stress is predicted to peak in March resulting from seasonal components, tax outflows, and constrained authorities spending.
The central financial institution’s intervention is essential in stopping a spike in short-term rates of interest that might disrupt monetary markets.
RBI Governor Malhotra faces a posh balancing act—injecting sufficient liquidity to stop a funding squeeze whereas avoiding extreme money that might stoke inflation.
Since assuming workplace in December 2024, Malhotra has overseen aggressive liquidity measures, together with Rs 49.18 lakh crore in funding injections via numerous devices. Nevertheless, deficits have remained unstable, oscillating between Rs 30,000 crore and Rs 3 lakh crore since mid-December.
The RBI’s intervention suggests a broader coverage recalibration, the place liquidity infusion takes precedence, even when it will increase the chance of forex volatility and inflation. With India’s fiscal deficit remaining excessive and authorities borrowing elevated, extreme liquidity might push bond yields decrease, complicating debt market dynamics.
