The Reserve Bank of India (RBI) has successfully addressed one of the most severe cash shortages in the country’s financial system through aggressive liquidity measures. Over the past three months, the Indian banking sector faced a significant cash crunch, with liquidity levels dipping into deficit territory. This situation was primarily caused by the RBI’s dollar sales to stabilize the rupee and advance-tax payments by corporations, which drained cash from the system.
To tackle this issue, the RBI injected over $70 billion (approximately ₹5.99 lakh crore) into the banking system since late January. These measures included open market operations, such as bond purchases, to infuse liquidity. As a result, the banking sector’s liquidity turned into a surplus for the first time in over three months. By March 29, the surplus stood at ₹71,700 crore ($8.4 billion), and it further increased to ₹89,400 crore on March 30.
The impact of these measures has been significant. Overnight borrowing costs have fallen below the RBI’s policy rate, making it cheaper for banks to borrow funds. Additionally, the yield on 10-year sovereign bonds dropped to a three-year low, reflecting improved market confidence. Analysts have highlighted that abundant liquidity is crucial for the effective transmission of lower borrowing costs to businesses and consumers.
The RBI’s actions are also aligned with its broader monetary policy goals. In February, the central bank reduced interest rates for the first time in nearly five years, and it is expected to cut rates further in its upcoming policy review on April 9. These rate cuts, combined with improved liquidity, are aimed at stimulating economic growth by making credit more accessible.
Furthermore, increased government spending has contributed to easing the cash crunch. The RBI is also expected to transfer a surplus dividend of approximately ₹2.6 trillion to the government in the April-June quarter, which will further enhance liquidity in the system.
While the immediate crisis has been addressed, experts caution that the RBI may need to continue its liquidity injections to maintain stability, especially given the possibility of reduced foreign inflows in the new fiscal year. The central bank’s proactive measures have provided much-needed relief to the financial system, ensuring that the economy remains on a stable footing.
