Liquidity Support Measures Likely to Continue Amid Tight Banking Conditions
Despite the Reserve Bank of India’s (RBI) recent efforts to ease liquidity constraints in the banking system, economists anticipate another interest rate cut in April 2025 to further stimulate economic growth. Experts argue that the previous rate reduction was insufficient to lower borrowing costs, boost private investment, and drive consumer spending.
Additionally, economists expect inflationary pressures to ease in the coming months, particularly as food prices moderate. This, they say, will provide further room for monetary policy easing, allowing the RBI to adopt a more accommodative stance.
Rate Cut Expectations Strengthen Amid Growth Concerns
Economists believe India’s GDP growth is likely to moderate in FY25 to around 6 percent, down from the revised 9 percent growth recorded in FY24. The slowdown in macroeconomic momentum and weak private sector investment are likely to push the RBI towards further easing of monetary policy.
“With food disinflation setting in and macroprudential restrictions being gradually relaxed, policymakers have room to maintain a dovish stance. We expect a rate cut in April, with a possible shift towards an accommodative policy stance,” said Radhika Rao, executive director and senior economist at DBS Bank.
In February 2025, the RBI reduced the repo rate by 25 basis points (bps)—the first cut in nearly five years—after keeping it steady at 6.5 percent for 11 consecutive policy meetings. Between May 2022 and February 2023, the RBI had raised the repo rate by 250 bps to curb inflation and bring it closer to the medium-term target of 4 percent.
However, with India’s economic recovery showing signs of fragility, particularly after GDP growth slowed to 5.6 percent in Q2 FY24, analysts believe the central bank will take further action to support expansion.
Tight Banking Liquidity Sparks Concerns
In addition to expectations of a rate cut, analysts also predict continued liquidity support from the RBI to counteract tight conditions in the banking system. Historically, March has been a period of liquidity stress, with funds being drained due to advance tax and Goods and Services Tax (GST) outflows.
“As we approach the end of the fiscal year, liquidity conditions tend to tighten due to tax outflows. We expect the RBI to inject additional liquidity in March 2025 to ensure core liquidity remains slightly positive,” said Gaura Sengupta, economist at IDFC First Bank.
To ease liquidity pressures, the RBI announced additional liquidity infusion measures on March 5, including:
- Two Open Market Operations (OMO) purchases worth ₹50,000 crore each.
- A $10 billion dollar-rupee buy/sell swap auction.
These auctions have been strategically timed around major tax payment deadlines to ensure liquidity remains stable:
- March 12 and March 18: ₹50,000 crore purchases via OMOs to offset advance tax outflows (due on March 15).
- March 24: Dollar-rupee swap auction to address GST-related liquidity pressures (GST payments due on March 20).
Foreign Exchange Interventions and Government Spending Impact Liquidity
Apart from tax outflows, the banking system’s liquidity has been under stress due to a combination of factors, including:
- Reduced government spending, which has slowed the release of funds into the system.
- RBI interventions in the foreign exchange market, aimed at stabilizing the rupee.
- Foreign portfolio investors (FPIs) selling Indian equities, which has led to capital outflows.
Since late 2024, the RBI has infused approximately ₹3 lakh crore in durable liquidity, utilizing a mix of:
- Variable Rate Repo (VRR) auctions
- Open Market Operations (OMO) purchases
- Dollar-rupee swap transactions
According to RBI data, the central bank has conducted liquidity injections totaling:
- ₹51.28 lakh crore through daily and normal VRR auctions, as well as OMO purchases.
- ₹1.30 lakh crore via dollar-rupee swap auctions.
RBI Reassures Markets of Continued Liquidity Support
The RBI Governor, Sanjay Malhotra, reaffirmed the central bank’s commitment to ensuring adequate liquidity in the financial system during the February 2025 monetary policy announcement.
“We have taken multiple steps to manage liquidity conditions and will continue to monitor market developments closely. The RBI remains proactive in taking appropriate measures to ensure orderly liquidity conditions,” Malhotra stated.
Outlook: RBI Poised for Another Rate Cut Amid Growth Prioritization
With economic growth slowing and inflationary pressures easing, economists expect the RBI to maintain a dovish stance in its upcoming April 2025 monetary policy meeting. The combination of a possible rate cut and additional liquidity infusion measures suggests the central bank is shifting towards a more accommodative policy approach to sustain economic expansion and financial stability.
Investors and market participants will keenly watch for further signals from the RBI as it navigates the evolving macroeconomic landscape in the coming months.
