The central bank will likely use other liquidity instruments, like open market operations (purchases), foreign exchange swaps, and long-term variable rate repo auctions (VRR), they said.
The RBI in its policy statement on Friday said that it will continue to be ‘nimble and proactive’ in its liquidity management operations to ensure that money market interest rates evolve in an orderly manner. Speaking to the media soon after announcing the policy, Governor Shaktikanta Das declined to give more details on the likely liquidity operations by the RBI.
“I will not be able to spell out what actions we have on the table, it will all depend on how the liquidity situation evolves,” Das had said.
System liquidity is expected to be under pressure by March because banks would likely deploy this additional liquidity – caused by the CRR cut – to repay some of their non-deposit liabilities. Banks’ liabilities to the rest of the banking system doubled to ₹5 lakh crore on October 23, to ₹2.5 lakh crore in 2019, according to Piramal Enterprises.
“The CRR cut only serves as a band-aid to ease money markets as liquidity tightens from December 2024 to March 2025. This announcement will potentially release ₹90,000 crore in December and ₹1.16 lakh crore by March 2025. The effect is expected to fizzle out beyond that,” said Debopam Chaudhuri, chief economist at Piramal Enterprises.The average system liquidity in October was at ₹1.47 lakh crore, reaching a two-year high of ₹2.88 lakh crore. In November, the average liquidity was ₹1.34 lakh crore, RBI data showed.A stronger dollar environment will also put pressure on system liquidity, as the RBI intervenes in the currency market to curb excess volatility in the rupee. The Indian rupee has depreciated to fresh lows of 84.74/$1 recently, as the Reserve Bank likely intervened in the foreign exchange market to prevent excess volatility in the rupee. The RBI has net sold $46 billion of its foreign reserves since October.
“The rupee may weaken more against the dollar than we have seen in the recent past. Constant inflation worries and a strong dollar environment will be the flavour of the year to come and may limit repo rate cuts to two (February and April). In this environment, liquidity instruments are likely to dominate, like the CRR, which was used on Friday,” said Pranjul Bhandari, chief India economist at HSBC.
The RBI on Friday delivered a 50 basis-point CRR cut to infuse liquidity in the system amid tight conditions. This becomes effective in two tranches – December 14 and December 28 – and offsets tight liquidity conditions caused by advance tax and GST outflows.
“One feels going ahead, it might be important for RBI to continue monitoring banking system liquidity conditions closely and continue to provide support for durable liquidity in order to support growth in credit to the productive sectors of the economy,” said Siddhartha Sanyal, chief economist at Bandhan Bank.