The Reserve Bank of India (RBI) engaged in significant bond purchases last week to address a severe cash shortage, the most extreme in over a decade. This strategic intervention signals the central bank’s commitment to stabilizing the Indian financial market.
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RBI’s Bond Buying Spree
Data released by the RBI revealed a substantial purchase of government securities totaling 101.75 billion rupees ($1.2 billion) for the week ending January 17th. This represents the largest weekly purchase since August 2021, indicating the severity of the current liquidity crisis. A Bloomberg Economics index highlights the extent of the deficit, with banks borrowing 3.3 trillion rupees from the RBI on Thursday, a record high since at least 2010.
One contributing factor to the cash crunch is the RBI’s ongoing dollar sales to bolster the weakening rupee, as explained by IDFC First Bank Ltd. These actions, while intended to support the currency, have inadvertently tightened liquidity within the banking system. Thursday’s substantial bond purchases, attributed to a group often including the central bank, fueled speculation of RBI intervention, according to Debendra Dash, a fixed income trader at AU Small Finance Bank Ltd. in Mumbai.
Addressing Liquidity Concerns
These bond purchases are anticipated to inject much-needed long-term liquidity into the banking system. Reports indicate that lenders have recently urged the RBI to implement more aggressive measures to mitigate the cash crunch. While the RBI hasn’t officially commented on these requests, the significant bond purchases suggest a proactive response.
The ‘others’ category, encompassing the monetary authority, insurance, and pension funds, acquired a net 72.22 billion in government bonds on Thursday, marking the highest level since June 2023, per Clearing Corporation of India Ltd. data. This underscores the collective effort to alleviate the liquidity strain.
RBI’s Liquidity Support Measures
The RBI has implemented several measures to address the cash shortage, including daily variable repo rate auctions on all working days. This provides banks with a consistent avenue for accessing short-term liquidity. However, experts like Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, believe more proactive liquidity infusion is necessary. The situation underscores the delicate balance the RBI must maintain between managing currency stability and ensuring adequate liquidity within the financial system. The yield on the 10-year note dipped one basis point to 6.72% on Friday, reflecting a five-point decrease for the week.
Conclusion
The RBI’s significant bond purchases signify a decisive effort to combat India’s severe cash shortage. The long-term effectiveness of these measures remains to be seen, but they indicate a commitment to stabilizing the financial system and addressing the concerns of lenders. The ongoing situation highlights the complexities of monetary policy and the challenges of balancing competing objectives in a dynamic economic environment.
