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India’s central bank has stepped up dialogue with traders at treasury desks this week about cash conditions in the banking system, according to people with knowledge of the matter, spurring speculation it may announce some measures to boost liquidity at the policy review on Dec. 6.
While Reserve Bank of India officials routinely call traders to check on various issues, the focus of the recent engagements has been on how the liquidity situation is panning out amid large foreign outflows from stocks and bonds, the people said, asking not to be identified as the deliberations were private.
Banks turned net borrowers from the central bank this week compared with a surplus of about 3 trillion rupees ($35 billion) in early November and the situation may worsen due to year-end tax payments.
The cash shortage may prompt RBI to turn to measures such as bond purchases or cutting the cash-reserve ratio for banks to stabilize the liquidity situation, said Shrisha Acharya, Vice President - Treasury, Anand Rathi Global Finance.
The cash shortfall pushed up the interbank weighted average call rate — a benchmark for overnight borrowing costs — to near the highest levels since June early this week. Higher overnight rates may make it more expensive for banks and companies to raise funds through short-term debt instruments, and hurt an already slowing economy.
Prior to this week’s tightening, banking system liquidity was in surplus for two months. When Donald Trump’s victory in the US elections early November sparked a wave of dollar strength, the RBI likely stepped up its dollar sales to shield the rupee from excessive volatility. That has sucked up liquidity from the local banking system.
Liquidity conditions are expected to tighten through the rest of the fiscal year due to RBI’s intervention to cap rupee volatility and seasonal leakage in currency in circulation due to the ongoing wedding season, Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, wrote in a note.
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