India’s RBI Said To Mull Bolder Measures To Ease Cash Crunch

India’s central bank may take stronger measures, including cutting cash reserve requirement for lenders, to ease tight liquidity conditions, according to people familiar with the developments.

The Reserve Bank of India may add lasting liquidity via tools including open market bond purchases, long-term foreign exchange swaps or a further cut in the amount of cash lenders must keep with the authority, the people said.

The central bank’s aggressive interventions to defend the rupee against a strong dollar has contributed to a cash squeeze in the banking system, with the deficit topping Rs 2 lakh crore ($23 billion) Wednesday. That had pushed up overnight borrowing costs by as much as 30 basis points above the RBI’s policy rate earlier this week.

The RBI didn’t immediately respond to an email seeking comment.

The government had a cash surplus of Rs 1.5 lakh crore as of Jan. 10, but the core liquidity shortfall still exceeds Rs 60,000 crore, according to Gaura Sengupta, chief economist a IDFC First Bank. This means that the system would remain in deficit even if the government spent its entire surplus.

“Core liquidity turning negative indicates that stress on system liquidity will persists, unless RBI infuses a large quantum of durable liquidity,” Sengupta said. Core liquidity, which includes government cash balances and funds in the banking system, was in a surplus of more than Rs 4 lakh crore in September, she said.

The RBI on Wednesday said it will hold variable rate repurchase operations on all working days until further notice, following calls from bankers and investors to address the crunch.

“The RBI still needs to do more” by way of open market bond purchases or by announcing another cut in the banks’ cash reserve ratio, says Nathan Sribalasundaram, rates strategist at Nomura Holdings Inc. “But they have bought themselves some time” by announcing the daily auctions, he said.