The Reserve Bank of India logo is displayed on a gate at the central bank’s headquarters in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg) 

RBI To Infuse Rs 40,000-Crore Liquidity In December

The Reserve Bank of India will continue to infuse liquidity into the banking system, to compensate for a pick-up in currency in circulation and stronger credit growth. To assure markets of liquidity support, the RBI has put out an upfront calendar of its planned bond purchases for the third consecutive month.

In a notification issued on Tuesday, the RBI said that it will infuse Rs 40,000 crore through bond purchases under its open market operation programme in December. This is similar to the amount of liquidity infused in November. The central bank said that it may choose to adjust its level of bond purchases based on the evolving liquidity situation.

The OMO amount stated above is indicative and RBI retains the flexibility to change it, depending on the evolving liquidity and market conditions, the central bank said.

The RBI will also infuse an additional Rs 10,000 crore through a round of bond purchases this week.

RBI To Infuse Rs 40,000-Crore Liquidity In December

Liquidity conditions have remained tight despite the RBI’s purchase of bonds. Contrary to the RBI’s guidance that it would maintain liquidity close to neutral, the system has been running a deficit of over Rs 1 lakh crore.

This has prompted calls for more measures from the RBI, with some analysts suggesting that a cut in the cash reserve ratio may be justified. “The RBI will likely cut CRR by 1 percent, releasing about $15 billion in December, if foreign portfolio flows don't revive by then, with inflation at sub-4 percent,” said Indranil Sen Gupta, chief India economist at Bank of America-Merrill Lynch, in a recent note.

The government, too, is continuing to call for easier liquidity conditions and may bring up the matter at the next board meet of the RBI in December. Speaking to BloombergQuint, Sanjeev Sanyal, principal economic adviser to the government, said that there is a case for easier liquidity conditions since inflation remains in check.

More liquidity is required and how that is provided is the RBI’s prerogative. If you look at LAF (liquidity adjustment facility) and other indicators, liquidity remains tight. Even M3 (broad money supply) is growing at 10 percent and thereabouts. Although reserve money has grown somewhat faster, you will see the multiplier process is subdued. I will argue that liquidity in general remains tight, particularly for SMEs, real estate firms.
Sanjeev Sanyal, Principal Economic Adviser, Government of India