Covid-19 Impact: RBI Takes Steps To Infuse Liquidity

To ensure that the effects of the Covid-19 pandemic on the Indian economy are mitigated and that financial markets and institutions continue to function normally, the Reserve Bank of India on Monday said it will once again conduct a sell/buy swap auction worth $2 billion to provide dollar liquidity. It will persist with long-term repo operations (LTROs) to infuse long-term rupee liquidity amounting to ₹ 1 lakh crore.

While there was speculation in the financial markets that the RBI would announce an inter-meeting repo rate cut in sync with what some of the other G-20 central banks have done to prop up their economies, Governor Shaktikanta Das said the RBI’s effort is to see that its responses are neither premature nor delayed.

“As per the RBI Act, decisions relating to the repo rate are taken by the Monetary Policy Committee (MPC). But I don’t rule out anything. I am not ruling out any possibility. Depending on the evolving situation, we will decide the timing of our action,” said Das.

The RBI said it will undertake another six-month US dollar sell/buy swap auction aggregating $2 billion on March 23 to provide liquidity to the foreign exchange market.

This auction announcement comes in the backdrop of the central bank receiving a thumping response to the auction conducted on Monday. As against the aggregate notified amount of $2 billion, the RBI received 78 bids totalling $4.67 billion. It accepted bids aggregating $2.06 billion.

In order to counterbalance the domestic liquidity effects of the swap and further improve monetary policy transmission, the RBI also said it will conduct LTRO in multiple tranches of appropriate sizes up to a total amount of ₹1 lakh crore at the policy repo rate.

“These two measures are based on our assessment of the current situation. The RBI has several policy instruments at its disposal. We will use the various policy instruments from time to time, depending on requirement. And our response will be calibrated,” said Das.

“...We will make every effort to see that whatever instrument or whatever policy announcements we make, they do have the desired effect, they do have optimum impact.”

Reacting to the announcement, Rajnish Kumar, SBI Chairman, said: “The RBI decision to ensure additional liquidity through LTRO and swap transactions will ensure the twin objectives of further compression in term structure of interest rates and ensuring dollar liquidity.”