Reserve Bank of India (RBI) announced a plethora of measures on Monday, 27 January 2025, to induce liquidity in the banking sector. The central bank’s measures will include bond purchases, currency swaps, Variable Repo Rate (VRR) and other measures to take the banking sector out of the cash crunch is it currently in. Analysts are also anticipating these liquidity measures are precursors for the upcoming rate cut which is expected next month.
Liquidity Injection into the Banking System
As per the announcement, the total liquidity influx through these open market operations of RBI would be ₹1.5 trillion. The prime reason behind this market liquidity influx is to help the sector revive after the cash crunch it went through. Though it was months back it took a toll on the lending rates, especially the overnight and short-term lending rates.
To implement these measures, RBI will be buying government bonds worth ₹600 billion in three tranches of ₹200 billion each. Apart from these, it will also conduct a 56-day VRR auction which will fetch another ₹500 billion starting on 7 February 2025.
However, that’s not all, the central bank will be conducting currency swaps to be precise USD/INR buy/sell swap action which will fetch another $5 billion. This will be conducted on 31 January 2025 for a period of six months from the day.
Challenges Faced by Banking Sector
This massive liquidity boost for the banking sector was necessary as the sector faced a liquidity deficit at its worst. In the fortnight ended on 24 January 2025, this deficit even widened to the highest seen in a year, shooting up to ₹2.39 trillion. Lack of government spending has been the prime reason behind the cash crunch of the banking system.
Bond Yields and inflation worries
With these measures, experts are anticipating that RBI has control over inflation, and in the upcoming days, it will also announce the first rate cut after three long years. However, with the measures coming into force, and as RBI already started buying bonds, the bond yields have started dropping.
Wrapping up
With these measures coming into play by the end of this month, the banking sector will be in focus and it has already started gaining as Nifty Bank and BSE Bankex both have jumped up by over 2% today until 1:30 p.m.
Source: HindustanTimes
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