RBI announced over $23 billion in liquidity measures via repos, FX swaps and bond buys to ease banking system stress amid rising yields and rupee pressure

The RBI has bought 3 trillion rupees of bonds during December-January, boosting the note-purchase tally for the fiscal year to a record high of 5.7 trillion rupees

 

The Reserve Bank of India on Friday unveiled measures to inject more than $23 billion liquidity into the banking system through a combination of bond purchases, buy/sell FX swaps and repos.

 

Under Governor Sanjay Malhotra, the central bank has stepped up liquidity injections over the past year to reinforce its rate cuts and to manage the impact RBI’s market interventions to support the rupee have on banking system liquidity.

The RBI will conduct a 90-day variable rate repo (VRR) operation for 250 billion rupees ($2.7 billion) on January 30, making it the maiden 90-day cash infusion. This will be followed by a three-year $10 billion USD/INR buy/sell swap auction on February 4.

 

The central bank will also purchase 1 trillion rupees of government bonds in two tranches on February 5 and February 12.

 

The RBI has bought 3 trillion rupees of bonds during December-January, boosting the note-purchase tally for the fiscal year to a record high of 5.7 trillion rupees.

 

A persistent rise in bond yields and concurrent pressure on the currency pose a so-called monetary trilemma for the central bank, which throws up trade offs between supporting the currency, anchoring borrowing costs and allowing unfettered capital movement.

“The durable liquidity measures were expected to ensure that system liquidity rises to RBI target levels of 0.6% to 1% of net demand and time liabilities,” said Gaura Sen Gupta, chief economist at IDFC First Bank. “The VRR is transient liquidity provided to ensure that overnight rates remain contained.”

 

She expects another 1 trillion rupees of bond purchases in March which will take the banking system liquidity to 0.9% of net deposits.

 

Steep borrowings have pushed up Indian bond yields over the last few weeks, while the rupee fell to a record low of 91.9650 to the dollar on Friday, pressured by foreign portfolio outflows and weakness in shares.

 

“The announcement was much needed and has come in line with expectations and should lead to some reversal in yields,” a trader with a state-run bank said.