India’s central bank may buy as much as 1.5 trillion rupees ($18 billion) of government bonds to replenish banking liquidity that’s expected to tighten later in the year, according to a top banker.
Liquidity is likely to tighten in the banking system as higher spending amid state elections due later in the year may lead to money leaving the system. A number of key states like Rajasthan, Madhya Pradesh and Chhattisgarh have elections due, and that will coincide with the busy credit season in October when demand picks up in the economy.
Excess liquidity in the banking system has narrowed to about 740 billion rupees from this year’s high of about 3 trillion rupees in April, according to data compiled by Bloomberg Economics. To ease the squeeze, the RBI injected about 468 billion rupees into the banking system on May 19 via a repo auction, the first such injection since March.
The move is expected to add about one trillion rupees of banking liquidity, according to estimates. It follows the RBI’s higher-than-expected dividend payout to the government, which may also boost cash in the system.
Following are some other key views:
The RBI should keep surplus liquidity at 1-1.5 trillion rupees if it wants to maintain a marginal surplus in the current era of liquidity management
The first rate reduction may happen in February. It may be a shallow cut cycle, but a 75-basis-point drop is possible
Medium-term view on rupee remains positive on the back of strong remittances and service exports
Short-term concerns remain on the rupee as traders who had gone long on the Indian currency are closing out the trades as the RBI prevented appreciation
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