'Awesome': Capitalmind CEO as RBI steps in with Rs 60,000 cr bond buys to ease liquidity crunch

The Reserve Bank of India (RBI) on Monday announced a significant intervention to tackle the ongoing liquidity crunch in the banking system, including the purchase of Rs 60,000 crore worth of government bonds. The move has been praised by Deepak Shenoy, CEO of Capitalmind, who called it "awesome" and explained its mechanics: “When RBI sells dollars, it takes rupees out of the system. Buying government bonds puts that liquidity back.”

The bond purchases are part of a larger Rs 1.5 trillion liquidity infusion package. Alongside bond buying, the central bank has outlined measures such as a $5 billion USD/INR buy/sell swap auction on January 31 and a Rs 50,000 crore variable rate repo auction on February 7. These steps aim to stabilise the banking system, which has seen its liquidity deficit hit Rs 2.39 trillion — the highest in a year — due to sluggish government spending.

While some, like Shenoy, see this as a necessary response to liquidity compression, others remain cautious. Hari Prasad, an investor, warned of potential inflationary risks. "RBI buying government bonds might fuel inflation, weakening the rupee’s purchasing power,” he argued, adding that liquidity injections without productivity gains could lead to currency depreciation.

However, Shenoy said: "This is to offset liquidity compression. It is not inflationary."

The measures come amid speculation that the RBI is preparing for a policy shift. A Prasanna, head of research at ICICI Securities Primary Dealership, suggested the bond purchases and other actions indicate the central bank’s confidence in inflation management. “The urgency that was being felt in the market has been addressed by the RBI through these steps. A rate cut would be the next logical step,” Prasanna told Reuters. The RBI’s rate-setting panel is set to meet on February 7, following the Union Budget presentation on February 1.

The government officials had earlier recommended longer-term repos, forex swaps, and bond purchases to address the cash crunch, according to Reuters. The RBI’s intervention has already calmed markets, with bond yields expected to fall by five basis points when trading resumes.

Ritesh Bhusari, joint general manager for treasury at South Indian Bank, noted that the RBI’s actions send a clear signal to markets. He said: “These measures indicate inflation is no longer a major concern, and monetary policy easing could be on the horizon.”

(With inputs from Reuters)