According to several of India's top fund managers, the central bank may take steps to pump cash into the banking sector before cutting interest rates this quarter.
Bandhan Asset Management predicts the Reserve Bank of India to inject up to 2 trillion rupees ($23 billion) by March through measures such as bond purchases, while UTI Asset Management believes the authority will use foreign-exchange swaps. Aditya Birla Sun Life AMC predicts another fall in the banks' cash reserve ratio.
Despite repeated requests for easing in the face of a slowing economy, the RBI is one of the few central banks in the world that has yet to decrease rates. In recent meetings with the central bank, lenders encouraged the authority to alleviate a liquidity bottleneck that could impede the transmission of rate decreases.
"Initially, they should inject liquidity because that is how you oil the market," said Canara Robeco Asset Management Company Ltd.'s fixed income head, Avnish Jain. "If the RBI cuts rates and there's not enough liquidity, it's not going to make much of a difference."
As of January 9, India's banking system has a deficit of 2.2 trillion rupees. That is close to the highest level since February 2024, which was attained in late December.
The shortage has pushed the interbank weighted average call rate, a benchmark for overnight borrowing costs, to near-record highs since April. The rate jumped to 6.88% last week, nearly 40 basis points higher than the RBI's current repurchase rate.
To be sure, the RBI reduced the cash reserve ratio — the proportion of deposits that banks must set aside with the central bank — during its December meeting. This week, it also completed a bond repurchase and infused liquidity through short-term repo operations.
Nonetheless, fund managers contend that its efforts are insufficient as deposit growth slows and economic growth stagnates.
"The sense is that they have to bite the bullet with open-market operations," said Suyash Choudhary, head of fixed income at Bandhan Asset in Mumbai. "The more the central bank delays it, the more they'll have to do it in a pointed manner in a short span of time."
