Following its long trail of prioritising inflation control through tight monetary policies, the Reserve Bank of India has finally decided to tilt the scale in favour of growth by ensuring increased liquidity in the market. The central bank has announced a major move to inject around USD 21 billion (Rs 1.9 trillion) into the banking system with an aim to ease lending conditions and support economic growth. This step is necessary as liquidity in the banking sector has remained tight due to tax outflows and lower-than-expected government spending over an extended time frame. Banks have been facing a liquidity deficit since mid-December, making it harder for them to lend money freely. Though the deficit narrowed to Rs 204.2 billion by March 4, the strain was still visible. To address this issue, the RBI has stepped in with measures that should help banks access more funds and pass on lower interest rates to borrowers.
To pump money into the system, the RBI will buy government securities worth Rs 1 trillion in two rounds—Rs 50,000 crore each on March 12 and March 18. In addition, the central bank will carry out a USD/INR buy-sell swap worth USD 10 billion on March 24, which will provide banks with rupees and help the RBI manage forex reserves. The announcement had an immediate impact on financial markets. Banking stocks saw an uptick, with public sector banks and non-banking financial companies (NBFCs) gaining investor confidence. The Nifty PSU Bank index rose by 1.46 per cent, and the Nifty Bank index climbed 0.72 per cent. Private banks, housing finance firms, and other financial stocks also saw gains.
Economists and analysts have welcomed the RBI’s move. Some believe that these actions are reflective of the RBI’s focus on supporting growth. Others see it as a larger than expected advancement that could eventually push the banking system into surplus in the coming months. It is no surprise that with more liquidity in the system, banks may lower their lending rates, making loans more affordable for businesses and consumers. This can subsequently drive investment and spending, which are certainly very crucial for economic expansion. It may be noted that India’s economy grew by 6.2 per cent in the last quarter of 2024, and the RBI’s latest actions are expected to keep the momentum going forward.
However, the RBI still has the onus of striking the classical balance between growth and inflation. While boosting liquidity is a recipe for high growth, too much money in the system can automatically fuel inflation. Currently, inflation is within the RBI’s target range, but the central bank needs to ensure that surplus liquidity does not drive prices up in the coming months. The global economic environment is also uncertain, with geopolitical tensions and fluctuating commodity prices adding to the broader risks. The RBI’s decision reflects its commitment to supporting economic recovery while ensuring financial stability. Going forward, the central bank will need to keep a close watch on inflation and global market conditions. Managing liquidity effectively will be key to sustaining growth without overheating the economy. The next few months will test the RBI’s ability to strike the right balance. This will be a crucial factor in shaping India’s economic trajectory.