RBI said to increase bank liquidity ahead of rate decision

(Bloomberg) — India’s central bank, which had been shoring up liquidity in the banking system ahead of a key policy decision, has drained liquidity in recent days in an effort to stabilize the rupee, people familiar with the matter said.

The Reserve Bank of India this week entered into buy and sell swaps worth an estimated $3 billion in the forward market, with maturities in March, May and November, people familiar with the matter said. They spoke on condition of anonymity because they were not authorized to speak publicly. The Reserve Bank of India has not conducted such transactions for at least six months, people familiar with the matter said.

In a buy-sell swap, the Reserve Bank of India buys U.S. dollars and simultaneously enters into a contract to sell U.S. dollars at a future date. When it buys dollars from the market, it eventually injects rupee liquidity. The measures follow possible dollar sales by the Reserve Bank of India over the past few weeks and are aimed at curbing rupee losses that have led to a cash shortage in the system.

The moves come as the slowest economic expansion in nearly two years puts increasing pressure on central bank governor Shaktikanta Das, whose term ends next week. The economic slowdown and liquidity depletion have fueled speculation that the Reserve Bank of India may take some liquidity easing measures at its December 6 policy meeting.

The Reserve Bank of India did not respond to a request seeking comment.

The RBI’s action sent the dollar/rupee one-year forward premium down 28 basis points to 1.96% on Wednesday, the lowest level since August.

Ahead of the Reserve Bank of India’s policy statement on Friday, several analysts pointed out that the central bank needs to announce measures to inject liquidity into the banking system and control borrowing costs amid slowing economic growth.

Economists at HSBC, including Pranjul Bhandari, wrote that the Reserve Bank of India may inject domestic liquidity by cutting the cash reserve ratio by 50 basis points this week and in the coming days. A range of other tools to inject cash will be “launched” within the month. in the comments.

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