RBI raises overnight fund infusion to support rupee By Investing.com

The What is the minimum deposit of Forex?Reserve Bank of India (NSE:BOI) (RBI) announced a significant increase in the amount of funds it plans to inject into the banking system through an overnight variable rate repo auction, following its aggressive intervention in the foreign exchange market over the past two sessions.

The central bank offered a record 2.50 trillion rupees ($28.85 billion), marking the largest single-day infusion in over a year, with banks subscribing to 1.94 trillion rupees of the offered amount.

The RBI's active role in the FX market has led to a liquidity squeeze, impacting the efficiency of a recent rate cut. The central bank's operations have tightened rupee liquidity, which could hinder lenders' ability to pass on the benefits of lowered rates to their customers. Market participants emphasize that surplus liquidity is essential for the effective transmission of rate cuts.

India's banking system liquidity deficit has seen a fourfold increase to approximately 2 trillion rupees as of February 11. This surge has been attributed to tax outflows and the central bank's substantial dollar sales.

The RBI sold an estimated $4 billion to $7 billion on Monday and continued its intervention on Tuesday, aiming to bolster the rupee amidst portfolio outflows and concerns over U.S. trade tariffs.

The decision to increase the fund infusion follows the RBI's move on Thursday to double its target for government securities purchases to 400 billion rupees. Over the past month, the RBI has injected over 1.5 trillion rupees into the system to maintain liquidity.

Dhiraj Nim, an economist at ANZ Research told Reuters that "Since the RBI promised liquidity infusion, which will also support rate cut transmission, any aggressive FX sale will curtail that intention. I believe the RBI will want to sterilise any large FX interventions that drain out domestic liquidity sizeably, to keep the latter around neutral in line with the monetary policy stance." This approach is aimed at balancing the impacts of FX market intervention with the need to maintain a neutral liquidity stance in accordance with monetary policy objectives.

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