Economists believe that the government’s and the Reserve Bank of India’s recent measures to attract foreign capital inflows will reduce the possibility of more bond purchases through open market operation (OMO) during the fiscal year.
“We expect liquidity conditions to remain comfortable over the coming quarter on account of capital flows and reduced pressure on the rupee on account of the measures announced,” said economists at HDFC Bank said in a report. They added that government spending along with a reduction in currency in circulation during June-September will support the liquidity.
They added that the possibility of any further OMOs by the RBI in FY27 has now significantly reduced. Management of frictional liquidity imbalances are likely to be addressed through fine tuning operations, and any FX interventions could be appropriately sterilised.
“We continue to expect liquidity conditions to tighten as we move into H2 FY27, particularly as this could also coincide with the beginning of the rate hike cycle,” the report noted.
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On Friday, the RBI Governor Sanjay Malhotra unveiled a host of measures to attract dollar inflows, including expanding the universe of government securities under fully accessible route, providing concessional forex swap for overseas borrowing, covering full hedging cost for FCNR deposits, and restoring the time for realisation of export proceeds, among others.
Moreover, the government exempted foreign from capital gains tax on investments into government securities.
Economists expect these measures to bring inflows around $40-50 billion, which will help to bridge the country’s balance of payments (BoP) gap in FY27.
“Whatever inflows are expected to come will help the system liquidity. In addition, the government’s cash balances has increased Rs 6-6.5 lakh crore after the RBI dividend inflows. Taking all this into account, it is positive on liquidity conditions. To that extent, the OMO requirement is expected to go down,” said Indranil Pan, chief economist at YES Bank.
In FY26, the RBI conducted bond purchases worth Rs 8.8 lakh crore, absorbing 60% of Centre’s gross market borrowing and 82% of net borrowings.
According to a report by IDFC First Bank , the improved BoP also means that the quantum of OMO purchases is likely to be much lower than last year.
“If we work with a neutral BoP, then the need for OMO purchases reduces to just Rs 3 lakh crore in FY27 vs earlier expectations of Rs 7 lakh crore. That said, there could be a temporary pick-up in banking system liquidity till September 2026 due to capital inflows, followed by a moderation in liquidity due to currency leakage and reduction in forward book.”
TOPICSECONOMYRBIThis article was first uploaded on June nine, twenty twenty-six, at nineteen minutes past six in the evening. © IE Online Media Services (P) Ltd