India’s Cash Crunch Spurs RBI To Weigh More Liquidity Infusions

India’s central bank has discussed the possible reintroduction of daily repurchase operations with market participants as it seeks to resolve a cash crunch that’s hampering its monetary policy transmission.

The Reserve Bank of India has sought feedback on the use of such a tool to better align banks’ borrowing costs with the key policy rate by providing a more predictable flow of funds in the financial system, according to people familiar with the matter. Talks are still in the early stages and no decision has been taken, the people said, asking not to be identified as the matter is private. 

Lenders’ overnight borrowing costs are hovering above the benchmark rate, complicating the central bank’s efforts to adopt a more accommodative policy to support growth.

The move marks the latest attempt by the RBI to address a cash shortage that’s threatening to weigh on an economy which is forecast to expand at the slowest pace in four years. The liquidity deficit, as measured by banks’ borrowings from the RBI, rose to more than 3 trillion rupees ($34.6 billion) in January, the highest since 2010.

Under the current liquidity model, the central bank’s main tool is a 14-day cash window, while shorter-tenure funds are provided or absorbed intermittently. The switch from daily repo took place in February 2020, as policymakers moved away from targeting a specific level of cash in the system. 

A spokesperson for the RBI didn’t respond to an email seeking comments. 

In an apparent return to day-to-day operations, the central bank said last month it would indefinitely carry out daily cash infusions via variable repo auctions. 

The central bank has taken a series of measures this year to ease tight liquidity conditions just as global funds are dumping Indian stocks and the threat of US trade tariffs adds to the risks. 

India’s banking liquidity started to tighten from mid-2022 as policymakers began raising interest rates after large cash injections during the Covid-19 crisis. On top of that, as the economy opened up after the pandemic, demand for loans outpaced growth in deposits, leaving lenders with a cash crunch.

The dearth of funds became more pronounced from the last quarter of 2024 due to the RBI’s dollar sales to shield the rupee from global headwinds. 

Separately, market participants have also asked the RBI to consider changing the daily timing for the calculation of the mandatory cash reserve ratio that lenders maintain with the central bank, the people said.  

Banks want the RBI to bring forward the deadline from 11:59 p.m. so that lenders don’t have to set aside reserves on funds that are maintained as a precautionary buffer.