On January 27, the Reserve Bank of India (RBI) announced a series of steps aimed at injecting significant liquidity into the banking system, including bond purchases and dollar/rupee swaps. The total infusion of around 1.5 trillion rupees ($17.39 billion) comes after an extended period of liquidity shortages, which had led to increased short-term lending rates. Analysts and traders are now speculating that these measures may signal an upcoming rate cut, with the RBI’s policy review set for February 7, following the federal budget presentation on February 1.
A Prasanna, head of research at ICICI Securities Primary Dealership, stated that these measures have addressed the market’s urgency and added that a rate cut seems to be the next logical step. The RBI’s action reflects confidence in managing inflation, and these steps are seen as a precursor to easing monetary policy.
As part of the relief package, the RBI will purchase government bonds worth 600 billion rupees in three tranches and conduct a 56-day variable rate repo auction worth 500 billion rupees on February 7. Additionally, the RBI will conduct a $5 billion USD/INR swap auction on January 31, with a six-month tenor.
With the banking system’s liquidity deficit reaching a one-year high recently, the RBI is focused on ensuring stability. Treasury officials have called for long-term repos and bond purchases to address the ongoing cash deficit.
Market analysts, such as Ritesh Bhusari from South Indian Bank, believe that the measures will likely result in a drop in benchmark bond yields and signal a shift toward monetary policy easing.
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