Global Risks To Challenge RBI's Liquidity Injection

But analysts warned that the trouble is not over yet and the rising global risks continue to pose challenges for Indian policymakers. RBI’s aggressive intervention in the foreign exchange market in the last few months to support the Indian rupee added to the liquidity squeeze.

The Donald Trump administration’s imposition of reciprocal tariffs from April 2 on all countries including India, may lead to a full scale trade war with escalation of tariffs. According to UBS Global Wealth Management, this could lead to inflation risks and weigh on equities, which could further put pressure on the Indian rupee forcing the RBI to intervene.

The RBI will continue to monitor the liquidity situation. 

Sources said that the RBI could look at further reduction of the cash reserve ratio (CRR) and statutory liquidity ratio (SLR).

While the CRR — the minimum quantum of deposits that banks are mandated to keep as cash reserves with the central bank, is at 4 per cent — the SLR is the mandated required liquid assets that banks have to keep with the central bank, and currently stands at 18 per cent.

“RBI has enough room to increase liquidity in the system, so this should not be of any immediate concern. We are almost certain that it (RBI) will use these in time,” a senior bank official told The Secretariat.

 What Led To The Liquidity Crunch

Heavy selling by the foreign portfolio investors due to the US political and economic policies and concerns over corporate earnings have impacted liquidity.

Besides RBI's intervention in the foreign exchange market, the year-end tax outflows and credit off-take also led to the acute liquidity crunch. Heavy selling by foreign portfolio investors due to US political and economic policies and concerns over corporate earnings squeezed liquidity as well.

“This is a situation that is not in our control, but we are constantly monitoring it, and we are ready to take necessary steps as and when required,” a government official said. The RBI has also said that it will “continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions.”

Meanwhile, to inject liquidity, the RBI decided to conduct OMO though auction of Rs 50,000 crore each in two tranches — the first on March 12 and again on March 18. The central bank, under OMO, either purchases or sells government securities to maintain money supply and even control inflation.

A recent report released by the State Bank of India (SBI) said the ongoing liquidity crunch was the worst in more than a decade. According to the report, the liquidity deficit in February was to the tune of Rs 1.6 lakh crore.

The first two months of this year have witnessed severe liquidity crunch. In January the liquidity deficit was estimated at Rs 2.07 lakh crore.

The liquidity crunch has also led to slowing investments.

“We have a few projects on hand but we are struggling for credit. Bank financing is still very weak and if the situation does not improve in the near future, we will be in trouble,” Faridabad-based firm SSP Private Limited’s CEO Saibal Ghosh told The Secretariat. 

The firm, specialising in turnkey project solutions in food and dairy processing, among others, is not alone. Concerns for several other firms, especially those categorised as micro, small and medium enterprises (MSMEs), have risen due to the liquidity crunch in the system.

However, for now, the RBI's announcement to inject liquidity has soothed the nerves of industry, including the MSMEs.

“The RBI’s announcement on Wednesday to inject liquidity is much needed. A tight liquidity situation can deal a blow to the MSMEs, many of which have already been hit by credit crunch,” Anil Bhardwaj, secretary general, FISME, told The Secretariat.

RBI’s Measures To Boost Liquidity

Since December, the RBI has continuously been injecting liquidity through various modes, including auctions of variable rate repo (VRR), OMO and reduction of CRR.

Rajiv Ranjan, Executive Director, RBI, in the monetary policy committee (MPC) meeting, said, “There is a need to preserve the high growth momentum over the medium term, necessitating monetary policy to be sensitive to the evolving growth scenario and to use various policy instruments, including liquidity injection, to reinvigorate growth.”

Amid slowing economic growth rate and falling investment rate, it will be crucial for the government and the RBI to ensure adequate liquidity in the system.