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RBI may need to buy $18bn of bonds to replenish banking liquidity
May 25, 2023
India’s central bank may buy as much as 1.5 trillion rupees ($18 billion) of government bonds to replenish banking liquidity that’s expected to tighten later in the year, according to a top banker.
The Reserve Bank of India may cut the cash reserve ratio by half a point in the fiscal second half and start buying bonds in the December quarter to keep banking liquidity at current levels, B. Prasanna, group head for global markets sales, trading and research at ICICI Bank Ltd, the nation’s second-largest private lender by market value, said in an interview Monday.
Liquidity is likely to tighten in the banking system as higher spending amid state elections due later in the year may lead to money leaving the system. A number of key states like Rajasthan, Madhya Pradesh and Chhattisgarh have elections due, and that will coincide with the busy credit season in October when demand picks up in the economy.
“The currency in circulation will remain high due to a number of state elections and national elections next year,” Prasanna said. “The currency coming in will go out as people take out the cash.”
Excess liquidity in the banking system has narrowed to about 740 billion rupees from this year’s high of about 3 trillion rupees in April, according to data compiled by Bloomberg Economics. To ease the squeeze, the RBI injected about 468 billion rupees into the banking system on May 19 via a repo auction, the first such injection since March.
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