The Reserve Bank of India (RBI) is planning to continue adding a large amount of money into the banking system to protect the Indian economy from global problems, according to experts.
IDFC FIRST Bank says that RBI might inject up to Rs 4 trillion (around $47 billion) this financial year. This will be done through buying government bonds and doing foreign exchange (forex) swaps. SBM India believes that around Rs 2 trillion could be added just in the first half of the year. This will be in addition to the huge $80 billion already added since January.
Why is this important? When there is more money (liquidity) in the banking system, it becomes easier for banks to pass on interest rate cuts to businesses and people. This is especially important now, as Indian exports might be hit by new US tariffs. RBI is expected to cut interest rates again on April 9, after already cutting them in February for the first time in five years. Some experts think this could push interest rates to their lowest level in three years.
According to Gaura Sen Gupta, Chief Economist at IDFC FIRST Bank, in past times when RBI cut rates, there was usually extra money—about Rs 2 trillion—in the system to help pass the rate cuts effectively.
At the same time, RBI is also preparing for a situation where the banking system could face a shortage of money again. This might happen between April and June when about $35 billion in forex contracts mature. If RBI does not renew those contracts, it will have to return the dollars, reducing the money supply.
Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, says RBI may have to continue renewing those forex contracts or do more bond purchases to keep enough cash in the system.
Last week, the RBI surprised everyone by announcing another Rs 80,000 crore worth of bond purchases in April. This helped the bond market, and the 10-year government bond yield fell to 6.46%, the lowest since January 2022. Analysts at Nomura think it might drop further to 6.25%.
Thanks to these efforts, the banking system now has extra money, compared to a shortage of Rs 3.3 trillion in January. That cash crunch—the worst in over 10 years—was mainly caused by RBI selling dollars.
Sen Gupta from IDFC FIRST Bank said these new purchases show that the RBI wants to keep the banking system filled with enough cash on a regular basis.
