RBI’s Liquidity Infusion Stronger Than Expected, Says Citi

The Reserve Bank of India’s recent liquidity infusion measures have exceeded expectations, according to Citi’s latest analysis. The RBI announced an infusion of approximately Rs 1.8 lakh crore through foreign exchange swaps and open market operations, which is higher than Citi’s initial estimate of Rs 1 lakh crore. This move is expected to shift durable liquidity from a slight deficit to a surplus by the end of March.

RBI’s liquidity infusion, comprising a $10 billion FX swap and Rs 1 lakh crore in OMOs, is aimed at replacing some of the Rs 1.8 lakh crore outstanding variable rate repos maturing in early April, Citi said.

The infusion is expected to create a durable liquidity surplus of approximately Rs 1.2 lakh crore by the end of March, with the overall liquidity surplus potentially reaching Rs 3 lakh crore, including outstanding VRRs, the brokerage said.

"The timing of the liquidity infusion measures coincide with the tax outflow of March, ensuring that there is no sudden tightness in liquidity at the fiscal year-end," it said.

As of Feb. 21, durable liquidity was in a slight deficit of around Rs 3,500 crore. The RBI’s measures are designed to ensure there is no sudden tightness in liquidity at the end of the fiscal, coinciding with the tax outflow in March. The timing of these measures is crucial to maintaining liquidity stability, Citi noted.

The brokerage expects dovish minutes from the Monetary Policy Committee, downside risks to growth from trade wars, and a likely below-4% Consumer Price Index for February, supporting the view of at least two 25 basis points rate cuts in April and June. The frontloaded macroprudential easing and liquidity infusion are seen as steps to bolster economic growth and stability.