In This Economy...: RBI Opens The Liquidity Floodgates—But Is It Enough?

The week that went by was filled with fast-moving developments in the international trade division. As India is clearing the deck for a Tesla landing, tariffs on US imports and counter tariffs on India exports are at the centre of the debate. 

Sources are telling Shrimi that a committee is already reviewing the tariff structures and will make recommendations to the government soon. The panel is essentially assessing the scope of possible tariff reductions and is tasked with recommending the best course of action.

Will this panel be able to bring some much-needed clarity on how India will actually escape the reciprocal tariff trouble? Guess we will find out next month. 

Now, on to our newsletter for the week!

The week that went by was filled with fast-moving developments in the international trade division. As India is clearing the deck for a Tesla landing, tariffs on US imports and counter tariffs on India exports are at the centre of the debate. 

Sources are telling Shrimi that a committee is already reviewing the tariff structures and will make recommendations to the government soon. The panel is essentially assessing the scope of possible tariff reductions and is tasked with recommending the best course of action.

Will this panel be able to bring some much-needed clarity on how India will actually escape the reciprocal tariff trouble? Guess we will find out next month. 

Now, on to our newsletter for the week!

The Reserve Bank of India announced a special $10 billion buy/sell swap program as it aims to shore up domestic liquidity. So, what is a buy/sell swap exactly? The RBI will essentially buy dollars from banks in the market, infusing the equivalent rupee amount. During this transaction, the banks enter into an agreement to buy back the dollars at the end of the specified time period.

The RBI deploys these measures to ensure that short-term liquidity needs are taken care of. What is interesting here, though, is that this is a three-year swap transaction. The current swap transaction will infuse around Rs 87,000 crore worth of rupee liquidity.

This is in addition to a whole host of measures it already deployed in the last few weeks. At three years, the liquidity infusion is expected to be far more durable than shorter tenure measures. But why does the RBI need to step in with such measures?

The central bank is mindful that the broader financial system is facing a net liquidity deficit. As the end of the year approaches, tax outgo will further dampen available liquidity. This has the ability to push up the cost of funds at least in the immediate term, which is something the RBI wants to avoid.

On Feb. 7, the monetary policy committee voted in favour of cutting the repo rate by 25 basis points to 6.25%. The last rate cut was five years before that, in 2020. In the MPC minutes released last week, RBI Governor Sanjay Malhotra was quoted as saying that a “lower policy rate is more appropriate at this juncture” after looking at the macroeconomic data points.

While the MPC has been careful about not giving away too much about future rate cuts, it is widely expected that at least one more rate cut is in order. 

A liquidity scenario that is too tight will affect the transmission of lower rates to the broader ecosystem. This is something the central bank wants to avoid. 

Now the key question is if this Rs 87,000 crore is enough to take care of the liquidity deficit. That depends on where RBI wants the system liquidity to be at, says Arvind Chari of Quantum Investment Advisors. 

Currently the liquidity deficit is at around 1% of net demand and time liabilities. If the RBI wants a more neutral liquidity position, a.k.a. neither a deficit nor a surplus, far more liquidity infusions are necessary and soon.

The other key question is if liquidity infusions have the ability to undo all the work the RBI and MPC have done to curb the inflation menace. If there is a lot of cash floating around in the system, it may cause things to become more expensive. Currently demand in the economy is sluggish. Moreover, the liquidity infusions are being done to cover the deficit, essentially filling a hole. In the current scenario, the liquidity will not be very inflationary, Chari said on the phone. 

1. Shrimi Choudhary reports on the new government panel, which will review tariff structures ahead of the bilateral meet between India and the US.

2. Sesa Sen speaks to Vivek Yadav of Havells India about their EV charging infrastructure plans.

3. Delhi residents will likely face higher health insurance costs as pollution weighs heavy on medical bills. Siddharth Singhal of Policybazaar and Dr Pritpal Kaur, a pulmonologist from Apollo Spectra, told NDTV Profit.

4. Tata Capital is finally set to hit the markets with an IPO, with the company's board having approved the listing. This was mandatory to be done by September 2025, under RBI's NBFC norms.

5. RBI has made the first move on removing all foreclosure charges and prepayment penalties on floating rate retail loans and MSME loans up to Rs 7.5 crore. The regulator released a draft set of guidelines, which will hopefully become final soon. 

The chart shows that after a short period of credit and deposit growth rates remaining in tandem, the divergence has widened again. This is a repeat of what the banking system faced for nearly two years, as credit growth consistently outpaced deposits, creating a tough situation for bankers.

Chanda Kochhar, former MD & CEO at ICICI Bank, has started her own YouTube podcast series called “Journey Unscripted.”Kochhar joins a long list of India’s cottage podcast industry, which has only been rising, save for the latest controversy involving a popular podcaster. Kochhar herself is no stranger to controversy, as her exit from her former employer was not amicable. The exit was preceded by a whistleblower letter alleging quid pro quo between Kochhar’s husband and the promoter of Videocon Industries, which was an ICICI Bank borrower. While the bank’s board initially backed Kochhar and absolved her of any wrongdoing, pressure eventually started mounting. An independent investigation was initiated, and Kochhar left the corner office. In December 2022, Kochhar and her husband were arrested in an “abuse of power” case and then got bail in January 2023. The case is still ongoing. 

Until next week, this is Vishwanath signing off!