Market bats for continued OMOs, currency swaps to RBI as liquidity pinches

Subscribe to enjoy similar stories. In a pre-policy interaction with the Reserve Bank of India (RBI), economists and market participants broadly converged on one message: the central bank should focus on easing liquidity in the banking system rather than cutting interest rates, two economists and two treasury officials told Mint. With growth and inflation seen as largely stable, the discussion centred on tools to address liquidity, which have remained under strain due to persistent RBI intervention in the foreign exchange market to curb excessive rupee volatility, strong credit growth, and advance tax outflows.

RBI’s Monetary Policy Committee will meet on 4-6 February, which will be its last such meeting of the current financial year. After delivering a 25 basis point rate cut last month, market participants said it is unlikely the rate-setting panel will cut rates again. Market participants said there is little appetite for a rate cut at this stage.

“Nobody was asking for a rate cut, and everybody was asking for liquidity only," an economist who attended the meeting said. The market favoured a mix of instruments to ensure durable liquidity. Among the suggestions, the strongest consensus favoured the continued use of open market operations (OMOs) and dollar buy-sell swaps.

This has come as the market has become increasingly vocal about the need for durable liquidity infusions rather than reliance on short-term tools such as variable-rate repo operations. As of 21 January, liquidity in the banking system was in deficit of ₹60,000 crore. An email sent to RBI seeking confirmation on the same did not elicit any response till press time.