
The Reserve Bank of India (RBI) has significantly increased liquidity in the banking system, which has led to expectations of a potential repo rate cut. The RBI has injected nearly Rs 7 lakh crore into the system through various measures, including bond purchases, forex swaps, and variable rate repo (VRR) auctions. Analysts believe this could signal a 25 basis point repo rate reduction in the upcoming policy announcement.
On April 1, the RBI announced it would inject Rs 80,000 crore through open market operations (OMO) in four separate tranches. A recent meeting between RBI officials and bankers highlighted that effective transmission of rate cuts would depend on sufficient liquidity support. The Monetary Policy Committee (MPC) began its review meeting on Monday, with the policy decision expected on Wednesday.
Despite a 25-basis-point repo rate reduction in February, banks did not pass on the full benefit to borrowers due to a high liquidity deficit. Bankers noted that tight liquidity had kept their cost of funds elevated, limiting the transmission of the rate cut to customers.
As of April 3, banking sector liquidity was in surplus, amounting to Rs 2.2 lakh crore, compared to a deficit of Rs 1.3 lakh crore on March 27. The weighted average call rate (WACR) also dropped from 6.16% on March 27 to 5.99% on April 3, after liquidity improved.
The RBI’s recent actions, such as open market operations, forex swaps, and VRR auctions, indicate a commitment to effective monetary policy transmission while pursuing a rate-easing trajectory. With a subdued growth outlook for the financial year, amid global challenges, many experts are predicting a 25-basis-point repo rate reduction in April, as well as a shift to a more accommodative monetary policy stance.
The RBI conducted the second tranche of the OMO purchase auction on Tuesday, receiving an overwhelming response from banks, with bids amounting to over Rs 70,144 crore, far exceeding the notified amount of Rs 20,000 crore. As part of its efforts to inject liquidity, the RBI is conducting OMO purchases in tranches scheduled for April 3, 8, 22, and 29.
In addition to OMOs, the RBI has implemented other measures, such as lowering the cash reserve ratio, conducting VRR and long-term repo auctions, and utilizing forex swaps to ease liquidity stress. These measures are aimed at infusing both short-term and long-term liquidity into the system.