NIFTY Bank jumps 800 points after RBI introduces measures to infuse ₹1.5 lakh crore in the economy

In a major relief to the Indian economy, the Reserve Bank of India announced various measures to boost liquidity in the monetary system. On Monday, RBI announced it would inject liquidity into the economy via open market operations (OMOs) like bond-buying programmes. The central bank will inject nearly ₹1.5 lakh crore worth of liquidity into the system in tranches.

The central bank will buy government bonds worth ₹60,000 crore in tranches of ₹20,000 crore each. The auctions will be held on January 30 and February 13 and 20. This will inject long-term liquidity into the system for banks to lend.

Secondly, on February 7, the RBI will conduct a 56-day variable repo-rate auction worth ₹50,000 crore, injecting short-term liquidity into banks. The move is expected to provide enough liquidity with banks till March 31, 2024.

Lastly, RBI will conduct a currency swap of $5 billion for a six-month tenor, thereby buying dollars from the banks in exchange for the rupee and selling them back after six months.

These three major measures are expected to boost liquidity in the economy, which is much needed at the current juncture. Overall, credit growth in the economy came down to 8% in the system from 15% at its peak in 2024. It also sets the tone for the probable rate cut in the February meeting.

During the 2018-19 period, RBI faced a similar slowdown in managing liquidity through OMOs, which was later followed by a rate cut.

What does the ₹1.5 lakh crore liquidity injection mean for markets?

Amid a credit crunch and poor offtake of credit, the economy faced dual challenges of a slowdown in industrial growth and weak consumption demand. The RBI’s latest liquidity management measures provide much much-needed boost for the economy to stimulate growth.

A liquidity injection by the RBI through the above-mentioned measures suggests a probable rate cut in the coming policy meeting. A policy rate cut gives a major boost to investor sentiments and the economy altogether, as it gives confidence in growth while balancing inflation.

Banks could be the primary beneficiaries of this move, as they get more liquidity to lend. A rate cut also increases demand for credit, boosting earnings. Secondly, the currency swap mechanism will hold currency volatility in check and could benefit the export sector.