Short-Term Borrowing Costs and Central Bank Measures
Industry experts anticipate that short-term borrowing costs for Indian lenders could decrease as early as next month due to central bank measures designed to enhance systemic liquidity. These measures are expected to lower rates on instruments such as certificates of deposit (CD) and commercial paper (CP), subsequently reducing lending rates sooner than anticipated.
Central Bank's Liquidity Management
- The Reserve Bank of India's (RBI) liquidity management stance has shifted from 'neutral' to 'accommodative' as indicated by significant liquidity infusions through various tools.
- Short-term rates are expected to ease in FY26, aided by lower inflation, likely extending RBI's easing cycle.
Current Liquidity Scenario
- Higher interbank call rates have been observed due to the liquidity crunch, with the weighted average call rate (WACR) peaking at 6.81% in January, later decreasing to 6.21% by March 12.
- The RBI has already infused ₹4.1 lakh crore into the market through open market operation (OMO) purchases, with additional ₹1 lakh crore planned in March auctions.
- Dollar/rupee buy/sell swaps totaling $15.16 billion have been auctioned, with another $10 billion planned for March 2025.
Future Liquidity and Banking System
- An aggregate rupee liquidity infusion through swaps is projected to reach around ₹2.15 lakh crore by the next quarter.
- Total liquidity infusions are expected to shift banking system liquidity into surplus territory.
- A potential dividend transfer from the RBI to the government could further enhance system liquidity.
- Banks are expected to maintain sufficient liquidity due to existing statutory liquidity and cash reserve requirements.
Impact on Interest Margins
- Moody's Ratings suggests net interest margins may slightly decline as banks adjust loan rates in response to policy rate cuts before adjusting deposit rates.