RBI’s ₹ 700 bn cash infusion in April was unable to revive the economy, further efforts are expected to continue.
HEAD SHOT
- In April, RBI infused nearly ₹ 700 bn in the banking system through its $5 bn buy/sell swap auction, but the stabilizing effects were temporary.
- RBI will undertake a new set of Open Market Operations (OMOs) to buy 250 bn rupees ($3.61 bn) worth of bonds in May.
- As per reports, RBI is expected to conduct OMOs of up to ₹ 500 billion and at least one more rupees for dollars swap over the next two months.
- RBI’s measures have been unable to help Banks lower interest rates due to liquidity challenge and high deposit rates.
In a bid to revitalize the economic growth of the country, the Reserve Bank of India (RBI) is on the lookout to conduct at least one more swap of rupees for dollars. The swap will take place post the staggered general election which ends on May 19th, three officials with direct knowledge of the plan told Reuters.
As per the sources, the apex bank will also conduct open market operations (OMOs) of up to ₹ 500 billion over the next two months. This is part of the plan to expand a quantitative easing programme to inject fresh impetus into the sluggish economy.
Increased cash flow and lower interest rates
RBI’s moves aim to increase the amount of cash flow in the market. The move also intends to support debtors by lowering interest rates. An anonymous official told Reuters:
“We want to make sufficient liquidity available, but we cannot open the floodgates of liquidity. It has to be done in a calibrated and measured way,”
The move comes as RBI has been unable to get banks to reduce lending rates even after slashing its key policy rate by 50 basis points to 6 percent in 2019.
Banks have been unable to lower interest rates because of tight cash flow in the market and high deposit rates. There have been no official comments from the RBI in this regard.
Slow economic growth expected to continue
India’s economic growth lost momentum in the Oct-Dec quarter when it stood 6.6 percent, its worst figure in five quarters. Economists and market analysts expect a further deceleration in coming quarter. This is due to the high incumbent interest rates and surging oil prices due to global trade disputes.
While the OMOs and forex swaps showed slight signs of stabilizing the liquidity position in the market, the effects were temporary. As per financial services company Nomura, cash in circulation leakage, risk to portfolio flows, and NBFC rollovers will factor in on cash flow issues in the coming months.
Revival efforts to continue post-elections
The Reserve Bank undertook a fresh round of open market transaction to purchase government securities totaling 250 billion rupees. On 2nd May, it initiated the first auction for ₹ 125 billion worth of bonds. Another official told Reuters that RBI could do two to four more open market operations of similar amounts in the months of June and July. The step will be supported by more forex swaps post the elections.
As per reports, RBI is expected to review the amount of currency in circulation in June. Post that the apex bank will decide the amount of liquidity required by banks, before moving ahead with concrete details on the rupees for dollars swap.
Situation will improve in second half of 2019
Two earlier RBI buy/sell swap auctions worth $5 billion infused around ₹ 700 billion into the system through auctions in March and April. However, the move was unable to help banks lower interest rates for borrowers. The official told Reuters that further liquidity infusion by the RBI will be initiated as per market requirement.
Nomura foresees the liquidity situation in the Indian market remaining problematic and expects further action from the RBI. It added that second half of the year could witnessed more sustained positive effects from RBI’s efforts.
The uncertainty around monetary policy, growth and policy continuity and fiscal policy is likely to clear up after the formation of the new government. It added that more OMO announcements moving forward will stabilize bond markets at current levels.
PARTING SHOT
- Analysts expect the tight liquidity conditions and pressure on NBFCs will force RBI to make further OMO announcements.
- RBI was unable to ease the pain for borrowers even after slashing its key policy rate by 50 basis points in 2019.
- Economists expect further deceleration in the coming quarters due to the high interest rates and mounting oil prices.
- More sustained growth is expected in the second half of 2019 when the cloud around monetary policy of the new government dissipates.
