Banks, dealers want RBI to act on the liquidity front
Mumbai, Jan 9, 2025
Synopsis
Banks and primary dealers urge the Reserve Bank of India (RBI) to inject liquidity through foreign exchange swaps or OMOs in the upcoming policy meeting on February 7. The aim is to ease system liquidity deficit and high forward premiums affecting short-term borrowing costs and importers.
Banks and primary dealers are urging the Reserve Bank of India (RBI) to inject liquidity into the market through foreign exchange swaps or open market operations (OMOs) during its upcoming policy meeting on February 7, as system liquidity has logged a deficit since mid-December.
With short-term borrowing costs at three-year highs and rupee forward premiums near two-year peaks, market participants expect the RBI will act to ease the current liquidity crunch. Higher forward premiums hurt importers.
One-month forward premiums, at 2.15% at the start of December, surged to 3.82% by December 31. They stood at 3.80% as of January 8.
The three-day monetary policy meeting will take place after the union budget is announced and would follow changes in US administration, giving the central bank a clearer picture of the macroeconomic landscape.
"The measures, if implemented, will have a dual impact of keeping forward rates low while managing system liquidity," said Ashhish Vaidya, head of treasury at DBS Bank. "The market is anticipating some sort of signal in the upcoming policy because by that time there will be clearer indication on the policies by the US government," he said.
The US policy indicators like tariff imposition and signals on the direction of rates could influence RBI's decision. On the other hand, the union budget will provide numbers on the quantum of government borrowing, fiscal deficit projections and specific debt-market measures.
Banks, Dealers Want RBI to Act on the Liquidity Front
Banking system liquidity has been in a tight deficit since December 16. In January, average system liquidity was in deficit at ₹74,610 crore. This comes after the RBI reduced the cash reserve ratio by 50 basis points to 4% infusing ₹1.16 lakh crore in the banking system.
The tight liquidity is majorly attributed to the RBI's intervention in the foreign exchange market. RBI has sold nearly $64 billion since late September to support the rupee from weakening sharply. RBI's intervention in the spot market has caused dollar liquidity to surge, prompting banks to request the RBI to conduct FX swaps.
"The RBI has a substantial offshore book that it wants to convert to onshore, which impacts liquidity. Some market participants have requested that the RBI convert these into forwards instead of intervening in the spot market," a foreign bank executive said.
Expectations of OMO purchases also drove down yields on the 10-year government security by three basis points to 6.748% on Monday. However, some believe a more sustained approach is needed.
[The Economic Times]
