How RBI Helped Overcome Record India Cash Crunch: Bloomberg Report

India’s financial system recently witnessed one of the worst liquidity crunches in its history. However, decisive action by the Reserve Bank of India (RBI) has turned the tide. According to a Bloomberg report, the central bank’s interventions have not only alleviated the cash shortfall but also improved key indicators such as overnight borrowing costs and government bond yields.

A Shift from Deficit to Surplus

As of March 29, the Indian banking system entered a liquidity surplus for the first time in over three months. Data from the RBI showed that banks parked ₹717 billion (approximately $8.4 billion) of surplus funds with the central bank—a clear sign of improving liquidity. This figure surged further to ₹894 billion the following day, underlining the pace and scale of the recovery.

Why Liquidity Matters

Abundant liquidity within the banking system is essential for the effective transmission of monetary policy, particularly interest rate cuts. Lower borrowing costs, enabled by surplus liquidity, make it easier for businesses and consumers to access credit, thereby stimulating economic activity.

The RBI, having reduced interest rates for the first time in nearly 5 years in February, is widely expected to cut rates again in its upcoming policy review on April 9. The easing of liquidity pressures reinforces this expectation.

The RBI’s Response: A Multi-Pronged Approach

The turnaround in liquidity can be attributed to a series of aggressive interventions by the RBI:

• Open Market Operations (OMOs): On 2 April, the RBI announced another round of open market bond purchases worth ₹800 billion, pushing the system further into surplus territory.
• Monetary Infusions: Since late January, the central bank has injected more than $70 billion (₹5,99,501 crore) into the financial system to mitigate the liquidity deficit. These efforts aimed to offset the impact of large-scale dollar sales (used to stabilise the rupee) and advance-tax outflows by corporations.

These actions have already begun to yield results. Over the past week, overnight borrowing rates have dipped below the RBI’s benchmark policy rate, and 10-year government bond yields touched a 3-year low last Friday, reflecting increased market confidence and easing financial conditions.

What Lies Ahead

Looking ahead, according to a report, liquidity conditions may improve further during the April–June quarter. A key contributing factor will be the RBI’s anticipated transfer of its surplus dividend to the central government, estimated at approximately ₹2.6 trillion (₹2,60,000 crore). This transfer is likely to inject additional funds into the economy, creating even more headroom for lending and investment.

Conclusion

The swift transition from a record cash crunch to a liquidity surplus highlights the effectiveness of the RBI’s timely and strategic interventions. While market participants await further clarity in the upcoming policy review, the immediate impact of the central bank’s actions is clear: eased borrowing costs, improved market sentiment, and a more stable financial environment.

This transformation is a testament to how targeted monetary tools, when deployed proactively, can steer an economy through turbulent phases.

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