RBI Boosts Liquidity Ahead of Key Policy Announcement
As the banking system prepares for a crucial policy decision, the Reserve Bank of India (RBI) has moved quickly to inject liquidity. This action comes after recent attempts to stabilize the rupee, which had caused the banking system to lose liquidity.
The RBI made a significant change by engaging in buy-sell swap agreements in the futures market with maturities scheduled for March, May, and November, totaling an estimated $3 billion. Sources claim that this is the first operation of its kind in six months. Through these swaps, the RBI essentially injects rupee liquidity into the system by buying dollars with the agreement to sell them later.
The RBI’s recent dollar sales, which were intended to stop the devaluation of the rupee, are in line with its plan. But because of these moves, there is now a cash shortage, which calls for quick steps to increase liquidity.
This comes as India’s economy is growing at the slowest rate in almost two years, which puts more strain on RBI Governor Shaktikanta Das as his term draws to a close. Market observers are speculating about possible liquidity-easing measures to stimulate growth and normalize borrowing prices ahead of a crucial monetary policy meeting on December 6.
The dollar/rupee one-year forward premium has already dropped 28 basis points to 1.96%, the lowest level since August, demonstrating the impact of the RBI’s efforts. According to numerous analysts, the central bank may lower the cash reserve ratio (CRR) by 50 basis points in the upcoming months in addition to using other instruments to inject money into the system.
In a note, Pranjul Bhandari and other HSBC economists speculated that the RBI may take a number of actions to preserve liquidity and lower borrowing costs in the face of the current economic downturn.
India’s financial environment may be altered by the RBI’s major statements in its next policy statement, even if the bank has not yet made any public comments.
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