RBI, Centre step up liquidity infusions amid 6-week long general assembly elections

The Reserve Bank of India has stepped up to ease banking system liquidity conditions as the six week long general assembly elections is hurting government spending, reported Reuters. As per Citi economists, RBI has stepped up short-term liquidity infusions as it has infused Rs 1.7 lakh crore via variable rate repo auctions since mid-April

"The RBI might be anticipating that the election-related delayed decision-making in the government might constrain spending and in turn cause further liquidity tightness," they said.

Meanwhile, on Friday, government announced buyback of bonds worth Rs 40,000 crore, which will infuse funds into the banking system. Following this, Yields on bonds maturing in 2-5 years fell 3-5 basis points on Monday. Longer-term yields also cooled.

Liquidity infusion

As per the Reuters report that quoted a person familiar with the government's thinking, the buyback of securities is a liquidity injecting tool, and will help in easing liquidity in the system. Reuters report further quoted economists and mentioned that India's average banking system liquidity has been in deficit since April 20 and is expected stay in deficit or close to neutral this month.

"The buyback announcement could be an exercise to infuse liquidity because we have an interim budget and the general election, so the government expenditure is lesser than usual," Gaura Sen Gupta, India economist at IDFC FIRST Bank told Reuters.

An economist at Equirus Group Anitha Rangan noted that in April-June 2023, government spending was Rs 2.78 lakh crore, and stood at Rs 1.75 lakh crore in the same period a year before. She then added that this year the spending during the same period would be significantly lower.

Voting in India's national elections began on April 19 and will conclude on June 1, with counting on June 4. Typically, government spending slows during polls and picks up only after a new government is in place and a budget is presented.

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