sb.scorecardresearch

Updated 15:56 IST, February 5th 2025

Thank You RBI, India’s Liquidity Crunch Just Eased - What Did Central Bank Do?

India’s banking liquidity deficit has shrunk significantly after the RBI injected over $7 billion through bond purchases and forex swaps.

Reported by: Business Desk
Follow: Google News Icon
  • share
RBI
RBI | Image: ANI

India’s cash crunch has more than halved following a series of liquidity measures by the Reserve Bank of India (RBI) aimed at stabilizing the financial system and supporting economic growth.

According to a Bloomberg Economics index, deficit liquidity—measured by the amount banks borrow from the RBI—fell to ₹660.4 billion ($7.6 billion) as of February 4, a sharp decline from ₹2.2 trillion on January 30. The easing liquidity crunch follows the central bank’s interventions, including open market bond purchases and foreign-exchange swaps.

Lower Borrowing Costs, Declining Swap Rates
As per the report by Bloomberg, the liquidity infusion has had an immediate impact on borrowing costs. The weighted average call rate, which reflects overnight lending rates between banks, has fallen from a peak of 6.88% in January to now align with the RBI’s benchmark policy repo rate of 6.50%.
Local swap rates have also responded, with the one-year swap rate dropping by 26 basis points below the RBI’s key rate.

Government Spending, RBI’s Dollar Sales Played a Role
The liquidity crunch had worsened in late January, with the banking system facing a shortfall of nearly ₹3 trillion, the highest in at least 14 years, as per the report by Bloomberg. Several factors contributed to this crisis, including:
The RBI’s dollar sales to curb rupee volatility, which drained liquidity.
Large tax outflows impacting cash reserves.
Higher cash withdrawals from banks.
However, a pick-up in government spending at the start of February helped ease some of the pressure, along with the RBI’s interventions.

More Liquidity Support May Be Needed
Despite the relief, some economists warn that additional liquidity support may be required in the coming months.

“There is a need for further liquidity infusion because the pressure on the rupee continues, which necessitates some amount of RBI intervention and that is a drag on liquidity,” said Sakshi Gupta, an economist at HDFC Bank, as mentioned in the report by Bloomberg. 

The RBI has announced plans to inject $18 billion into the banking system. So far, it has infused a little over $7 billion, with the first tranche executed on January 30.

As March approaches, another round of tax outflows is expected, which could put renewed pressure on banking liquidity. The RBI’s response in the coming weeks will be crucial in ensuring financial stability.

(With Inputs From Bloomberg)

Get the latest live news on Republic Business, along with breaking news and top headlines from Budget 2025, business, economy, markets, and around the world.

Published 15:56 IST, February 5th 2025