RBI May Extend Record Cash Boost As Risks Mount, Analysts Say

The Reserve Bank of India is likely to extend its record cash infusions into the banking system as it shields the economy from mounting global headwinds, analysts say.

The authority is expected to inject as much as four trillion rupees ($47 billion) through bond purchases and foreign-exchange swaps in the current fiscal year, according to IDFC FIRST Bank. SBM India estimates that up to two trillion rupees could be injected in the first half, adding to an unprecedented $80 billion already pumped in since January. 

A boost in liquidity is vital to ensure that interest-rate cuts are effectively transmitted, particularly amid rising risks such as the impact of the new US tariff regime on Indian exports. The RBI is expected to cut rates again on April 9, building on its first reduction in five years in February, with bulls predicting the easing will push benchmark yields to new three-year lows.

“In the past rate-cutting cycles, liquidity was in surplus of at least two trillion rupees for transmission to take place,” said Gaura Sen Gupta, chief economist at IDFC FIRST Bank. 

Global markets extended a rout on Monday as investors sought haven assets following China’s retaliatory measures against US President Donald Trump’s tariffs.

At the same time, the RBI may want to keep the banking system in surplus as upcoming net maturities of about $35 billion in the forwards market in April-June could once again lead to a cash deficit. The central bank needs to return the dollars if it chooses to not roll over the swaps at maturity.

“RBI’s short forwards position is expected to continue the need for rollovers or outright FX swaps or additional open-market purchases to keep liquidity in surplus,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank Ltd. 

The central bank surprised markets last week by announcing another 800 billion rupees of purchases for April, providing further tailwinds to bonds. The 10-year bond yield fell to 6.46% on Monday, matching a three-year low seen last week. Nomura Holdings Inc. predicts a further drop to 6.25% in the coming months.

The liquidity push has helped tip the banking system into surplus from a deficit of 3.3 trillion rupees in January. The cash squeeze — the worst in over a decade — was partly due to the central bank’s dollar sales. 

The fresh purchases “show that the focus of the RBI’s liquidity management is to make system surplus on a consistent basis,” IDFC FIRST’s Sen Gupta said. 

(Adds bond yields in the eighth paragraph)

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