RBI's Next Moves: Beyond Rate Cuts to Tackle Liquidity

A report by Emkay Research suggests that the Reserve Bank of India (RBI) needs to adopt additional measures beyond rate cuts to infuse liquidity into the banking system. Proposed measures include Open Market Operations (OMO) exceeding Rs 90,000 crore and easing upcoming liquidity norms. Analysts anticipate RBI's strategic policies.

In a recent analysis by Emkay Research, the Reserve Bank of India (RBI) has been urged to explore measures beyond the typical rate cuts to alleviate liquidity constraints within the banking sector.

According to the report, one of the suggested measures includes an additional round of Open Market Operations (OMO) amounting to Rs 30,000 crore, potentially driving the total liquidity infusion to exceed Rs 90,000 crore in the current fiscal year. The report also cautioned that a temporary reduction in the Cash Reserve Ratio (CRR) might not adequately address the ongoing banking stress.

The analysis advised the RBI to focus on adjusting the forthcoming stricter Liquidity Coverage Ratio (LCR) norms, which will take effect in April 2025. Furthermore, easing lending criteria could serve as a viable policy tool. Even as the market does not see a conventional 25 basis points rate cut in upcoming meetings as a contention point, stakeholders will watch for additional policy measures from the central bank.

In an era of what the report dubs 'easing by stealth,' the RBI might employ unconventional tools, like liquidity injections and regulatory adjustments, to mitigate stress in the non-sovereign money market. Additionally, the possibility of relaxing capital account restrictions via the Foreign Currency Non-Resident (FCNR) route remains on the table.

Despite recent efforts to boost liquidity, system-wide liquidity remains constrained, with Emkay projecting elevated deficits by the fiscal year's end. Any moves the RBI makes to address these challenges will be pivotal in determining India's economic landscape in the months to come.