Liquidity infusion: RBI may infuse Rs 2 lakh cr during December-March to ease crunch

Reserve Bank of India (RBI) is likely to increase liquidity infusion in the market, according to debt market sources. The quantum of open market operations (OMOs) may be increased to Rs 50,000 crore a month from December to March 2019 so that there is no deficit in the market during the peak credit growth season, according to treasury experts.

OMO is a process by which the central bank buys bonds from the banks and injects liquidity in the banking system.

“In the last three months, RBI has infused close to Rs 65,000 crore of liquidity through OMOs, but the banking system continues to be in a deficit mode so it is likely that the quantum of liquidity will be increased,” said an treasury official.

The RBI had earlier stated that the system liquidity will move into deficit in the second half of 2018-19 and the evolving liquidity conditions would determine its choice of instruments for both transient and durable liquidity management.

“We expect the RBI to step up OMO to Rs 50,000 crore a month between December-March to arrest further lending rate hikes,” Bank of America said in a report.

RBI after its Board meeting on Monday said it will inject Rs 8,000 crore into the system through the purchase of government securities on November 22.

“Based on an assessment of prevailing liquidity conditions and also of the durable liquidity needs going forward, RBI has decided to conduct purchase of the following government securities under Open Market Operations for an aggregate amount of Rs 8,000 crore on November 22, 2018,” the central bank said in a release on Monday.

RBI has also reduced the capital requirements, especially for the banks under prompt corrective action through its decision to extend the timeline for implementation of the last tranche of capital conservation buffer under Basel III. This, according to rating agency Crisil, is expected to reduce the burden on public sector banks in this fiscal by around Rs 35,000 crore.

This is also expected to give some relief to the government as the weak banks are wholly dependent on the government for their capital considering that PCA restricts their lending activities and hence their earning capacity.

Kotak Institutional Equities in a report said, “Our calculation suggests that the government has probably received a relief of $1.7 billion because of the delay in transition as they would have had to infuse this capital by FY2019.”

“The overall capital infusion to meet the guidelines now stands reduced (assuming the current CAR) to $2.7 billion as compared to $4.4 billion earlier,” it said.

This story first appeared in DNA Money: RBI may infuse Rs.2 L cr to ease crunch