RBI Cash Injections Erase India's Record Cash Crunch
Indian banking liquidity went into surplus for the first time in more than three months, as the Reserve Bank of India (RBI) injected funds aggressively to relieve one of the worst cash shortages in the financial system.
Based on RBI data, the surplus calculated by banks placing idle funds with the central bank was Rs 717 billion ($8.4 billion) as of March 29 and increased to Rs 894 billion on March 30. It is the first surplus reading since December 15.
The liquidity injection is important in reducing the cost of borrowing. The central bank reduced interest rates in February for the first time in almost five years and is expected to cut rates further in its April 9 policy review widely. A rise in government expenditure has also helped ease the cash crunch, IDFC First Bank's chief economist Gaura Sen Gupta said.
The RBI has injected over $70 billion into the banking system since late January to counter the liquidity deficit caused by dollar sales to stabilize the rupee and advance-tax outflows by corporates. The impact is visible, with overnight borrowing costs falling below the RBI’s policy rate and 10-year sovereign bond yields hitting a three-year low.
Additional relief is in the offing during the April-June quarter with the assistance of the central bank's excess dividend transfer to the government estimated at Rs 2.6 trillion. Sen Gupta warned, however, that while foreign inflows are likely to taper in the next fiscal, the RBI may have to persevere with persistent liquidity injections in order to keep stability intact.
The injection of liquidity is timely as India is going through economic challenges in a global economy, making enough funds available in the banking system to spur economic expansion.
