RBI’s master plan to deal with the fall in rupee, increased liquidity, bond yield fell, know what the RBI Governor said?

On the last day of the Monetary Policy Committee (MPC) meeting, the Reserve Bank of India (RBI) announced a cut in the repo rate by 0.25%, bringing the interest rate down from 5.50% to 5.25%. With this, loans will become cheaper than before, which will affect many sectors.

Apart from this, RBI also took steps to address the weakness of the rupee, which included increasing forex liquidity. The Reserve Bank of India’s decision to cut the repo rate by 25 basis points was unanimous, all six members of the Monetary Policy Committee voted in favor of the cut.

RBI aims to have immediate impact of rate cut on the system.

RBI Governor Malhotra said that inflation has fallen rapidly in the last two months, which has come below the lower level of the comfort zone of the Central Bank. At the same time, economic growth also remains strong.

This combination gave RBI the opportunity to further relax the policy rates. To ensure that low interest rates reach the system quickly, the RBI also announced two major liquidity measures, including buying ₹1 trillion of bonds through open market operations and a $5 billion rupee swap.

Why is swap important in addressing rupee weakness?

The dollar-rupee swap is a way for the RBI to increase liquidity without permanently increasing the supply of rupees. RBI sells dollars and immediately receives rupees, thereby adding rupees to the banking system.

Later, RBI buys back the dollars on a pre-determined date. This provides short-term liquidity to banks, just when the RBI wants to make borrowing easier, especially after the interest rate cut. This also helps stabilize the currency when the rupee is under pressure. In the previous session, the rupee briefly touched a record low of 90.42, but government and foreign banks were seen selling dollars, and traders trimmed some of their short-term positions, helping the currency recover slightly, according to a Reuters report. Nevertheless, most experts believe that the overall trend of the rupee remains weak.

Impact of RBI repo rate change on bond market

The bond market reacted quickly to the interest rate cut, with the yield on 10-year government bonds falling to 6.51%, while the stock market rose. The market continued to rise in banking, NBFC and IT stocks.