India central bank’s additional liquidity support to wind down after March, bankers say
The banking system’s liquidity surplus averages around 1.1% of deposits in February, inching past the 1% threshold
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[MUMBAI] The Indian central bank’s additional liquidity support to lenders – which has pushed overnight rates towards the floor of the policy rate corridor in a bid to ease the stress of the money market and improve transmission – is unlikely to extend beyond March, bankers have said.
Market participants say the liquidity push reflects an interim calibration, with the central bank aiming to ease short-term rates.
India’s banking system’s liquidity surplus has averaged around 1.1 per cent of deposits in February, inching past the 1 per cent threshold that the Reserve Bank of India (RBI) indicated in December.
This has dragged the weighted average call rate to about 5 per cent, below the policy repo rate of 5.25 per cent and near the floor of the policy rate corridor.
The secured overnight borrowing rate slipped to around 4.8 per cent in February, highlighting the extent of the cash surplus.
The liquidity injections “were in response to funding pressures that were building up” and “the usual channels of transmission were not proving effective”, a person familiar with the RBI’s thinking said, declining to be identified as they were not authorised to speak publicly.
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The RBI did not respond to an e-mail seeking a comment.
In January, the rates on India’s short-term corporate and bank borrowings rose to more than 10-month highs, signalling funding pressures.
After the liquidity injections, they fell by 15 to 30 basis points. The one-month overnight index swap rate dropped by up to 16 basis points.
“The RBI’s stealth easing has been particularly effective... with its immediate objective of alleviating funding pressures met, we expect (the central bank) to maintain the current approach till March,” said Mandar Pitale, head of treasury at SBM Bank in India.
Temporary relief
Bankers said the excess cash is not a strategic shift in the RBI’s liquidity management, and that the central bank is likely to absorb part of the surplus through variable rate reverse repos after March, a tool that has not been used since early December.
Liquidity conditions typically become volatile in March, the last month of the fiscal year, due to tax payments, the balance-sheet needs of banks and uneven government spending.
Allowing the call rate to consistently remain below the repo rate “is not likely to extend in FY27 as that would imply a deviation from (the RBI’s) liquidity management framework”, Gaura Sengupta, chief economist at IDFC First Bank, said. REUTERS
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