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RBI is "rightly" pumping liquidity in the slack April-September industrial season to ensure sufficient liquidity in the busy October-March season: BofAML (Reuters )

RBI needs to inject $35 billion in FY20 to allow 16% loan growth, says BofAML

  • The RBI on Tuesday said that it will inject 25,000 crore liquidity through open market operations (OMOs) in May
  • The RBI on Tuesday also conducted its second successful dollar swap auction of $5 billion

Mumbai: The Reserve Bank of India (RBI) needs to infuse $35 billion in durable liquidity in FY20 for banks to achieve a loan growth of 16%, according to Bank of America Merrill Lynch (BofAML).

Indranil Sen Gupta, chief India economist at BofAML, said in a note that this implies that the RBI has to infuse $2-3 billion a month as it has been doing.

This report comes after the central bank announced on Tuesday said that it will inject 25,000 crore liquidity through open market operations (OMOs) in May. The RBI on Tuesday also conducted its second successful dollar swap auction of $5 billion, receiving bids worth $18.65 billion, or more than three times what was on offer and injected 34,874 crore liquidity into the system.

On the question of how much liquidity will RBI put in through OMOs, the BofAML report said that its base case throws up around $20 billion assuming RBI forex intervention of $9 billion ($5 billion so far).

“Our stress tests suggest that this will clear the government securities (G-sec) market in most cases. This, in turn, would soften yields and create room for lending rate cuts. On our part, we do expect the RBI to buy forex at every opportunity given growing inadequacy of forex reserves," Sen Gupta said in the report.

BofAML also expects the RBI to allow the money market to slip into surplus mode as cash demand abates after the elections end in May. “It is rightly pro-actively pumping in the slack April-September industrial season to ensure sufficient liquidity in the busy October-March season. After all, Re 1 of RBI money typically takes six months to multiply into 5 of credit," it said.

Sen Gupta wrote that against this backdrop, it is only logical to let the money market to slip to reverse repo mode in the slack season to prepare to meet higher liquidity demand at repo mode in the busy season.

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