RBI's Moves to Mitigate Liquidity Crunch: Strategic Shifts Anticipated

The RBI may relax LCR norms to infuse liquidity into the banking sector, possibly incorporating the CRR in liquid asset calculations or staggering implementation. Such moves could benefit banks and NBFCs. Upcoming policies, including a Rs 1.5 trillion liquidity package, are keenly awaited amid ongoing liquidity challenges.

The Reserve Bank of India (RBI) is reportedly considering easing Liquidity Coverage Ratio (LCR) norms to pump additional liquidity into the banking sector, according to a Jefferies report. This potential policy shift could prevent banks from having to divert about Rs 7 trillion from loans to government securities or other liquid assets.

Jefferies outlines one possible strategy, which involves including the Cash Reserve Ratio (CRR) in the calculation of liquid assets—a step that could prove advantageous given Indian banks' already substantial liquid holdings. Alternatively, the RBI might introduce the enhanced LCR norms progressively, affording banks more time for adaptation.

The financial firm foresees RBI easing regulations to focus on boosting liquidity and decreasing rates by 2025, a move likely to favor banks and non-banking financial companies. The upcoming February Monetary Policy Committee (MPC) meeting, expected to feature the new RBI Governor, is closely watched for policy insights.

Amidst a liquidity crunch driven by foreign portfolio investor (FPI) withdrawals and dollar sales, the RBI injected Rs 1 trillion via a CRR cut in December 2024. Nonetheless, a Rs 3 trillion market deficit persists, exacerbated by a USD 6 billion FPI outflow and a USD 34 billion decrease in forex reserves recently.

To tackle the crisis, the central bank announced a Rs 1.5 trillion liquidity package, encompassing open market operations, 56-day repos, and USD/INR swaps. These measures aim to stabilize the situation, especially ahead of the fiscal year's end when liquidity demands typically rise.

Despite the December CRR cut releasing Rs 1.1 trillion, tight liquidity conditions endure. Market participants eagerly await further clarity on LCR norms and other regulatory measures at the forthcoming MPC meeting. (ANI)

(With inputs from agencies.)