RBI Is Said to Shore Up Banking Liquidity Before Rate Decision
India’s central bank has been shoring up banking system liquidity ahead of a key policy decision, having depleted it in recent days in its efforts to stabilize the rupee, according to people familiar with its transactions.
(Bloomberg) -- India’s central bank has been shoring up banking system liquidity ahead of a key policy decision, having depleted it in recent days in its efforts to stabilize the rupee, according to people familiar with its transactions.
The Reserve Bank of India has this week conducted buy-sell swaps estimated to be $3 billion in the forwards market, maturing in March, May and November, the people said, asking not to be named as they are not authorized to speak publicly. The RBI has not conducted such transactions for at least six months, the people said.
In a buy-sell swap transaction, the RBI purchases dollars while contracting to sell them at a future date. When it buys dollars from the market, it ends up injecting rupee liquidity. The measures follow RBI’s likely dollar sales, in the past few weeks aimed at curbing the rupee losses, which led to a shortage of cash in the system.
The moves come at a time when the slowest pace of economic expansion in almost two years is mounting pressure on central bank Governor Shaktikanta Das, with his term ending next week. A slowing economy and depleting liquidity have stoked speculation the RBI may take some liquidity-easing measures at its Dec. 6 policy meeting.
The RBI did not respond to a request seeking comment.
The RBI’s action pushed the dollar/rupee one-year forward premia lower by 28 basis points to 1.96% on Wednesday, the lowest since August.
Ahead of the RBI’s policy statement on Friday, several analysts have cited the need for the central bank to announce measures to inject liquidity into the banking system and keep a lid on borrowing costs amid slowing economic growth.
The RBI may inject domestic liquidity via a 50-basis-points cut in the cash-reserve ratio this week and “bring out a host” of other instruments over the next few months to pump in cash, HSBC economists, including Pranjul Bhandari, wrote in a note.
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First Published:5 Dec 2024, 08:10 AM IST
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