Reserve Bank of India Liquidity Measures
The Reserve Bank of India (RBI) has announced measures to address anticipated tight liquidity conditions by the end of the financial year FY25 due to tax outflows and banks rushing to meet targets. These measures are expected to infuse approximately ₹1.9 trillion into the banking system.
Open Market Operations
- The RBI will conduct open market operation (OMO) auctions to purchase government securities worth ₹1 trillion.
- This will be done in two tranches of ₹50,000 crore each on March 12 and March 18.
USD/INR Buy-Sell Swap Auction
- An additional USD/INR buy-sell swap auction for $10 billion with a tenor of 36 months is scheduled for March 24.
- This move aims to stabilize liquidity amid tax outflows and cash leakage.
- The banking system's liquidity has been in deficit for the past 11 weeks, with a recent reduction to a ₹20,000 crore deficit.
Bank and Market Reactions
- Banks are seeking liquidity measures due to market conditions where overnight rates are below the repo rate.
- Longer-term money market rates, such as 3-month CDs, remain elevated creating a 150 basis points spread with overnight rates.
Foreign Exchange Market Intervention
- The RBI is actively intervening in the foreign exchange market to curb volatility from uncertainties over US tariffs.
- On Wednesday, the rupee appreciated by 0.36% due to a weakening dollar and dollar sales by state-owned banks.
- The rupee is trading at 86.96 against the dollar, having depreciated by 4.09% in FY25 and 1.55% in CY25.
Global Tariff Impact
- The US has imposed tariffs on imports from Mexico and Canada and increased duties on Chinese imports.
- Reciprocal tariffs on India are expected from April 2, contributing to currency volatility.
- Despite tariff threats, talks of removing tariffs on Canada have influenced currency appreciation.