New Delhi January 27 2025: India’s central bank plans to inject nearly $18 billion into the domestic financial system as it steps up efforts to ease a cash shortage that is at its highest in over a decade and which some see as hurting growth in Asia’s third-largest economy.
The Reserve Bank of India will buy 600 billion rupees ($6.9 billion) worth of bonds via auction purchases in the open market, it said in a statement on Monday. It will also hold a $5 billion dollar/rupee buy/sell forex swap on Jan. 31 and inject another 500 billion rupees via a 56-day longer tenor repo auction Feb. 7, it said.
The move is on the back of current liquidity and financial conditions, the central bank said. On Jan. 15, the RBI said it would conduct a daily variable repo rate auction on all working days, and data on Friday showed it had bought a large quantum of bonds from the market.
Earlier this month, Bloomberg News reported that the RBI under new Governor Sanjay Malhotra was considering more measures to ease the prevailing cash crunch. Bulk of the cash shortage was mainly due to the central bank’s aggressive intervention in the forex market where the rupee has been hitting record lows against the dollar.
“It’s all hands in the game now,” said Radhika Piplani, an economist with DAM Capital. “Such measures before the budget and the next policy indicates that the governor wants the system to be ready by the time an interest rate cut takes place in the coming months.”
Calls for an interest rate cut have been growing after data showed India’s economy is set to expand at its slowest pace in four years. Many analysts fear that the current cash crunch could lead to tighter financial conditions which could hurt lending and impede growth.
The open market bond purchase auctions will be held in three equal tranches of 200 billion rupees on Jan. 30, Feb. 13 and Feb. 20, respectively.
Banking system liquidity is currently at a three trillion-rupee shortfall, according to a Bloomberg index, as the RBI’s forex intervention and tax outflows drained liquidity.
The yield on the 10-year bond fell to its lowest in nearly three years on Monday after data revealed the central bank debt purchases. RBI announced the liquidity steps after local markets closed on Monday. The rupee was down 0.13% in offshore trading.
“It is a bit earlier than expected but nonetheless a major move,” said Puneet Pal, head of fixed income at PGIM India Asset Management. “We can expect a further rally in bonds though I expect the curve to gradually steepen.”
