India's central bank announced on Wednesday that it will inject $21 billion in Rupee liquidity into the banking system to help ease lending conditions and stimulate economic growth.
The Reserve Bank of India (RBI) stated that it “will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions,” according to a press release.
As part of its strategy, the central bank will carry out two open market operations totalling one trillion Rupees ($15 billion) on 12th March and 18th March.
In addition, it will execute a US Dollar-Rupee buy-sell swap worth $10 billion on 24th March, according to the central bank, Reuters reports.
As of 4th March, Indian banks faced a liquidity deficit of 204.2 billion Rupees, the smallest deficit since 15th December.
Liquidity conditions have remained strained since mid-December, primarily due to tax outflows, the RBI's US Dollar sales in the foreign exchange market to stabilise the Rupee, and lower-than-expected government spending.
Last month, the RBI reduced interest rates by 25 basis points. When liquidity conditions are more favourable, they typically facilitate a smoother pass-through of loan rates, ensure better policy transmission, and support economic growth.
India's economy grew by 6.2% in the October to December period, driven by higher government and consumer spending, according to the latest data.
Furthermore, these latest measures show “the focus of monetary policy is now firmly on supporting growth by easing financial conditions and providing much-needed liquidity,” according to Gaura Sen Gupta, India economist at IDFC FIRST Bank.
Following the infusion, core liquidity, which includes both banking system liquidity and government cash balances, is expected to remain in a “comfortable surplus” of 1.6 trillion Rupees by the end of March, up from a surplus of 180 billion Rupees as of 21st February, Sen Gupta stated.
Since mid-January, the central bank has injected more than 4.5 trillion Rupees into the banking system.
This total includes 1.39 trillion Rupees from bond purchases, approximately 1.31 trillion Rupees through foreign exchange swaps, and 1.83 trillion Rupees from early April maturity repo auctions.
The bond market and the Rupee are expected to react positively on Thursday, with forward premiums likely to decline, as the measures reflect “deft liquidity management by the central bank,” said Bank of Baroda economist, Aditi Gupta.