RBI: Looking through the liquidity management tea leaves
RBI policy might have surprised the market with its dovish tone and stance change to neutral, but the change in RBI policy was already visible in its liquidity management. Indeed, since July 2024, interbank liquidity surplus has averaged ~INR1.2tn (0.5% of NDTL or deposits). The last time similar levels of surplus liquidity were seen was in June to August last year and the RBI responded by imposing incremental ICRR of 10%.
In contrast during the current phase of liquidity surplus, RBI has refrained from any strong liquidity absorbing measures. Persisting with VRRRs and VRRs to keep the weighted average call rate near the repo rate. The TREPS rate where maximum volume of transactions take place, has been averaging below the repo rate over the last few months.
The rise in liquidity surplus has been led by higher general government expenditure post the final budget. This is reflected by the reduction in general government cash surplus from peak levels of INR5.1tn May 24th 2024 to INR1.8tn surplus as of Oct 4th 2024. The surge in government cash surplus in May 2024 was due to RBI dividend which was substantial at INR2.1tn.
Another indication of RBI’s comfort with surplus liquidity condition is its FX intervention. In H1FY25, RBI net bought US$8.8bn of dollars, which represents infusion of Rupee liquidity. The quantum of purchase of dollars is much lower than last year (US$17.7bn in H1FY24). This is because balance of payments surplus in H1FY25 has reduced with widening trade deficit.
Since July 2024, RBI had started
