RBI’s cash injections help ease cash crunch, spur bond rally

Indian banking sector liquidity turned to surplus for the first time in more than three months as aggressive fund injections by the Reserve Bank of India (RBI) helped erase one of the worst-ever cash crunches in the financial system, Bloomberg reported.

The surplus, which is measured through banks deploying excess funds with RBI, was at Rs71,700 crore ($8.4 billion) as of 29 March, the first such reading since 15 December, central bank data showed. The value increased further to Rs89,400 crore on 30 March.

RBI pared interest rates for the first time in five years in February, and is expected to cut again in its 9 April policy review.

The surplus liquidity with banks is key for transmission of the lower borrowing costs following RBI’s rate cut, analysts said.

To boost liquidity further, the central bank on Tuesday further announced a fresh round of open market bond purchases worth Rs80,000 crore ($9.3 billion).

The Rs80,000 crore of bond purchases adds to more than $70 billion of cash injections by RBI into the banking system since late January to ease the deficit, caused by RBI’s dollar sales aimed at stabilizing the rupee and advance-tax payments by corporates.