India’s central bank said on Wednesday it will infuse $21 billion in rupee liquidity into the banking system in a bid to ease lending conditions and boost economic growth.
The Reserve Bank of India (RBI) “will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions,” it said in a press release.
As part of the measures, the RBI will conduct two open market operations, totalling one trillion rupees ($11.50 billion) on March 12 and March 18. It will also conduct a dollar-rupee buy-sell swap worth $10 billion on March 24, the central bank said.
Indian banks’ liquidity deficit stood at 204.2 billion rupees as on March 4, the lowest level since December 15.
Liquidity conditions have been tight since mid-December largely due to tax outflows, dollar sales by the RBI in the foreign exchange market to stabilise the rupee and lower-than-expected government spending.
The central bank cut interest rates by 25 basis points last month. Comfortable liquidity conditions typically help in better pass-through of loan rates, ensure policy transmission and push economic growth.
India’s economy expanded by 6.2 per cent in October-December, picking up on increased government and consumer spending, latest data showed.
Wednesday’s measures indicate “the focus of monetary policy is now firmly on supporting growth by easing financial conditions and providing much-needed liquidity,” said Gaura Sen Gupta, India economist at IDFC FIRST Bank.
Post the infusion, core liquidity, taking into account banking system liquidity along with government cash balances, will remain in a “comfortable surplus” of 1.6 trillion rupees by March-end from a surplus of 180 billion rupees as on February 21, Sen Gupta said.
The central bank has infused over 4.5 trillion rupees into the banking system since the middle of January.
This includes 1.39 trillion rupees of bond purchases, around 1.31 trillion rupees through foreign exchange swaps and 1.83 trillion rupees of early April-maturity repo auctions.
The bonds market and the rupee should react positively on Thursday and forward premiums are expected to fall as the measures indicate “deft liquidity management by the central bank,” said Aditi Gupta, economist at Bank of Baroda.
($1 = 86.9740 Indian rupees)
