By Sravya Vemuri
The central bank will inject an additional liquidity of Rs. 1 Lakh crore through long-term repo operations. This is seen as a step to provide adequate liquidity to banks for lending in March. The bank will conduct four variable rate term repo auctions in March 2018 for longer tenors up to 31 days every Tuesday this month for Rs 25,000 crore.
Aiding the volatility
The infusion will help cap the short-term rates and also help in lowering the rate volatilities for the rest of the month. Presently, the system is moving to a liquidity deficit mode according to various bankers. This is the second such significant cash infusion after a similar one in 2016 when multiple measures were adopted to infuse approximately Rs 80,000 crore.
A measure of quantitative easing by RBI?
It is seen as a typical quantitative easing measure to support growth, which is a key objective of the RBI. However, the process works differently in Indian scenario unlike in the developed economies, which have strong bond markets that make the transmission of policy moves easier. Quantitative easing is done to boost the economy when there are deflationary tendencies, which is not the case in India. Also, unlike in the developed economies, India’s inflation dynamics is not some phenomena that can be controlled by monetary policy alone, as it is majorly linked to supply constraints too. Additionally, interests’ rates alone cannot influence the investor or consumer behaviour in India. With this, even if the policy moves look similar, the effect on the Indian economy would not be like that of a quantitative easing.
Lowering the lending rates
These measures will make more lendable resources available to the banks, which in turn, would lead to lower lending rates in the economy. The central bank mainly aims at getting the core liquidity deficit into the neutral position. Also, substantial cash infusions are seen as a take away from the conventional monetary policy of India, which is characterised by accommodating the rates. Besides easing the liquidity, such infusions will also help strengthen the balance sheets of the banks and give a boost to their core operations of lending and borrowing. As banks will be able to meet the regulatory capital requirements, their credit ratings will improve, and this will enable them to raise cheaper resources. Also, the capital infusion will allow the banks to reduce net NPAs.
It would reaffirm the trust in public sector banks and support by the sovereign state. The capital infusion will increase the lending capacity of the banks and therefore aid growth of the economy as a whole. Due to lack of liquidity, the economy will face deflationary tendencies, which would make ripple effects in the economy. However, capital infusions are criticised on various grounds. One of them is the argument that they have to be more prudent and policymakers should take decisions from the long run perspective. However, the move is seen as a measure to avert such adverse effects.
Featured Image Source: Visual Hunt
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