Indian Central Bank's Massive Debt Purchases Seen as De Facto Rate Cut, Analysts Say

By Dharamraj Dhutia

MUMBAI (Cryptonesia) – Analysts suggest that the Reserve Bank of India’s plan to purchase 1.25 trillion rupees ($14.66 billion) worth of bonds in May could potentially reduce the cost of overnight interbank loans, essentially functioning like a reduction in interest rates.

Debt acquisitions may boost liquidity within the banking sector, aiding in the dissemination of the two interest rate reductions declared this year and ensuring that the practical expense of funds remains beneath the establishedrepo rate of 6.00%.

Whenever the RBI purchases bonds, it introduces more liquidity into the banking sector, thereby lowering the cost for banks to lend funds to one another on an overnight basis. Consequently, this decreases the overnight interbank lending rates, which serve as crucial short-term interest rates within the financial system.

CONTEXT

Under Governor Sanjay Malhotra, who assumed office in December, the RBI has injected substantial liquidity into the banking sector. In addition, the bond buying program set for May will come after acquisitions totaling 1.20 trillion rupees in April and 2.83 trillion rupees from January through March.

Malhotra stated earlier this month that the central bank aims for additional bond acquisitions totaling approximately 1% more than deposit levels, equivalent to roughly 2.30 trillion rupees to 2.50 trillion rupees.

MARKET REACTION

On Tuesday, the weighted average overnight call money rate stood at 5.93%, though it is anticipated to decrease to around 5.75%. This reduction aligns with the interest rate provided by the Reserve Bank of India for banks depositing surplus funds into the Standing Deposit Facility (SDF).

On Tuesday, Indian government bond yields dropped following the announcement of the debt purchasing program for May. The 10-year bond yield reached as low as 6.32%, down from 6.40% recorded the previous day.

KEY QUOTES

Aditi Gupta, an economist at Bank of Baroda, stated that with adequate home-market liquidity, we might anticipate the weighted average call rate to decrease even more and come into close alignment with the SDF rate.

Samiran Chakraborty, Citibank’s head economist in India, mentioned that currently, the Reserve Bank of India aims to focus on increasing the amount of long-lasting liquidity, aiming for at least 1% of total deposits, with some flexibility allowing for even greater figures.

GRAPHIC

IN NUMERICAL ORDER Financial assistance provided by the RBI through multiple methods starting from early 2025:

Tools Month Amount of Funds Injected

in billion rupees

Secondary market bond purchases in January amounted to $388.25

OMO January 200.2

6-month FX swap February 445

OMO February 800

OMO March 1445.41

3-year FX Swap March 870

3-year fx swap March 865

OMO April 1200

OMO - planned May 1250

($1 equals 85.2650 Indian Rupees)

(Dharamraj Dhutia reporting; Edited by Sonia Cheema)

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