Surprisingly, No Liquidity Measure Visible In MPC Announcement

There was no new liquidity measure announced in the recently concluded Monetary Policy Committee (MPC) meeting of RBI, still one sees more infusion ahead. While market participants were disappointed with no explicit announcement on further liquidity infusion measures, such announcements do not need to be made on the day of MPC policy per se, and can be undertaken as and when needed. Policymakers may also not want to exhaust all tools in their kitty at one go, especially as global dynamics are highly fluid and tricky, implying the need to ensure enough tools for reacting in times of stress.

January liquidity measures are yet to be completely implemented, and near-term system liquidity, including durable liquidity, has turned comfortable compared to the soaring deficits seen in January. The system liquidity deficit has come down, from Rs3.1trillion on January 2023 to Rs0.7 trillion now. However, Emkay maintains that after improving in February, system liquidity will turn ugly, to a deficit of up to over Rs2.5trillion by end March sans any additional liquidity measures.

This implies that more measures are on the anvil if the RBI finds this level of deficit uncomfortable for policy transmission, especially as the depth of the cut cycle is still arguable. Experts see more OMOs in primary/secondary markets, followed by VRRs and more FX swaps, especially as the RBI’s forward book is heavy with large near-term maturity. Analysts expect additional OMO purchases of Rs300billion ahead.

Analysts maintain that the RBI will address any frictional or non-frictional liquidity stress accordingly, to aid smooth liquidity transmission. Moreover, they see system liquidity deficit turning ugly again, to the tune of over Rs2.5 trillion by end March sans any additional liquidity measures. As expected, RBI commenced the rate easing cycle with a unanimously agreed 25bps cut, as policy trade-offs are turning less challenging with tepid underlying growth, easing inflation concerns, and a perceptible change in the RBI’s INR management stance. However, the stance was understandably maintained at ‘neutral’ as the policymakers prefer maintaining flexibility on rates and liquidity management, and not be tied uni-directionally given the fluid global dynamics that may also require them to be more nimble on policy responses for ensuring financial and macro-economic stability. The MPC noted that despite a recovery ahead from the lows of Q2, growth is much below that of last year.

Apart from providing adequate liquidity to the banking system and working on improving liquidity efficiency, the regulatory framework would also be assessed. The RBI Governor, Sanjay Malhotra candidly mentioned in his speech that while strengthening and enhancing the regulatory framework is necessary, ‘there are trade-offs between stability and efficiency’, and that the RBI will attempt to ‘strike the right balance’ between this when formulating regulations.

This can be seen as tacit acknowledgment of the recent regulatory tightening likely being a tad too The outlook for inflation, as per Ecowrap, will be largely shaped by food inflation trajectory.