RBI to look for additional measures other than rate cut to infuse enough liquidity: Report
New Delhi: The Reserve Bank of India (RBI) will have to look for additional measures other than a rate cut to infuse enough liquidity in the banking system according to a report by Emkay Research.
Among other options suggested by Emkay Research, includes another round of Open Market Operations (OMO) worth Rs 30,000 crore to inject liquidity into the economy.
The report highlighted that the total liquidity infusion through OMO in the current financial year (FY25) could surpass Rs 90,000 crore.
It said, "We expect another round of ~Rs300bn OMOs, implying Rs900 bn+ in total in FY25E. A CRR cut is a close call, but a temporary cut may not address the underlying banking stress".
The report noted that a temporary CRR reduction may not effectively resolve the ongoing stress in the banking sector. Instead, the RBI needs to focus on easing upcoming tighter Liquidity Coverage Ratio (LCR) norms, which are set to take effect from April 2025.
Additionally, relaxing lending standards could be a preferred policy tool to address liquidity concerns.
The report suggested that while a conventional 25 basis points rate cut in the upcoming Monetary Policy Committee (MPC) meeting is not a major topic of debate in the market, investors and analysts will closely watch for additional policy measures beyond a rate cut.
The central bank may continue its strategy of "easing by stealth" through unconventional policy tools, such as liquidity injections and regulatory adjustments. The RBI is also expected to take steps to address stress in the non-sovereign money market.
Furthermore, the report indicated that the central bank could consider additional measures to ease capital account restrictions, possibly through the Foreign Currency Non-Resident (FCNR) route. The RBI has already taken significant liquidity-boosting measures in recent months.
Despite these efforts, system liquidity remains tight. While the overall liquidity deficit has eased from a high of Rs 3.1 trillion at the end of January 2025, Emkay Research estimates that it could still remain elevated at Rs 2.5-2.8 trillion by the end of FY25.
The core deficit is expected to range between Rs 1.1-1.3 trillion. If the RBI finds this level of liquidity shortfall uncomfortable for policy transmission, it may introduce additional measures to support the economy, especially as the outlook for the depth of the interest rate cut cycle remains uncertain.
The market will keenly watch RBI's next policy moves, particularly in addressing liquidity constraints and banking sector stress, as these factors will play a crucial role in shaping economic conditions in the coming months.
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