RBI’s likely to raise liquidity to keep ‘short’ rates in check

Mumbai: India’s central bank is likely to boost liquidity ahead of the fiscal year end, economists said, as it seeks to restrain short-term rates from spiking and offset the impact of its currency-market interventions that sought to arrest the rupee’s precipitous slide since the start of the Iran war.

The Reserve Bank of India‘s (RBI) liquidity-enhancing arsenal includes open market operations (OMOs) for bond purchases, or dollar-rupee buy-sell swaps, bankers and economists said.

The aim of such exercises is twofold: to keep system liquidity comfortable and to ensure call money rates sit at the lower end of the liquidity adjustment facility (LAF) corridor, helping contain short-term borrowing costs for banks and prevent bond yields from rising.

“The central bank has so far relied on liquidity operations rather than altering the policy rate in February and March. For now, RBI may prefer to keep overnight rates below the repo rate until there is more clarity on how long this war could drag on,” said Dhiraj Nim, economist and FX strategist at ANZ Bank.

RBI’s policy repo rate kindly stands at 5.25%, with the LAF corridor adjusted accordingly.

According to market estimates, the central bank has sold nearly $12 billion since the start of the West Asia crisis to defend the rupee, a scale of intervention that typically tightens rupee liquidity.

Despite this, RBI has managed to hold system liquidity around 1% of net demand and time liabilities (NDTL) through February and March, partly by stepping up liquidity support operations.The average call money rate softened to 4.99% in February and 5.00% in March, compared with 5.26% in January and 5.28% in December, RBI data show. The call rate tends to track the repo rate closely, making liquidity management critical during periods of volatility.

Imported Inflation Risks

Meanwhile, the rupee that is on course to be among the worst performing Asian currencies this year has depreciated a further 1.6% since the war started, and closed at a record low of 92.48/$1 as of Friday.

OMO purchases have emerged as a key tool in recent months. In February, RBI bought ₹12,715 crore on-screen, in addition to ₹50,000 crore via auction-based OMOs. In January, on-screen purchases totalled ₹71,395 crore, alongside ₹1.5 lakh crore of auction-based OMOs, RBI data showed. Madhavankutty G, chief economist at Canara Bank, expects the central bank to continue supporting liquidity through further OMOs.