RBI's Next Move: Beyond Rate Cuts to Boost Liquidity

As per Emkay Research, the Reserve Bank of India (RBI) may need to implement measures beyond rate cuts to enhance banking liquidity. Key suggestions include Open Market Operations of Rs 30,000 crore and easing liquidity norms. The market anticipates policy actions addressing liquidity challenges and banking sector stress.

The Reserve Bank of India (RBI) is exploring additional measures beyond rate cuts to improve liquidity in the banking sector. A report by Emkay Research suggests that another round of Open Market Operations (OMO) worth Rs 30,000 crore could be crucial to infusing liquidity into the economy.

The report forecasts a total liquidity infusion exceeding Rs 90,000 crore through OMOs in the fiscal year 2025. Analysts emphasize the potential of another Rs 300 billion in OMOs, bringing the total to Rs 900 billion by FY25. While a Cash Reserve Ratio (CRR) cut is possible, the report argues it may not sufficiently address underlying banking stress.

The report advises the RBI to address upcoming tighter Liquidity Coverage Ratio norms effective April 2025 and suggests relaxing lending standards as a preferred policy tool. Although a 25 basis points rate cut is unlikely to be a central topic at the upcoming Monetary Policy Committee meeting, investors are keenly observing for additional measures. The RBI might employ 'easing by stealth' through liquidity injections and regulatory adjustments. Further steps, including potential easing of capital account restrictions via the Foreign Currency Non-Resident route, could be considered. Despite liquidity-boosting efforts, system liquidity remains tight, necessitating continuous scrutiny by the market of the RBI's policy maneuvers.