Page 57 - Policy Economic Report - April 2025

POLICY AND ECONOMIC REPORT
OIL & GAS MARKET

Liquidity and Financial Market Conditions

• Liquidity Shortage and RBI Intervention: In January 2025, the banking system faced a shortage of
funds, known as a liquidity deficit. To address this, the Reserve Bank of India (RBI) provided up to
?3.1 lakh crore on 23rd January through the Liquidity Adjustment Facility (LAF) – a tool that allows
banks to borrow money from the RBI for short periods to manage temporary mismatches in cash
flow.

• Improved Liquidity Position: The RBI later infused about ?6.9 lakh crore into the system, and
increased government spending in late March helped further. These actions improved the
situation, and by 7th April 2025, the system had a liquidity surplus of ?1.5 lakh crore – meaning
there was more money available in banks for lending and investment.

• Softening of Market Rates: With more liquidity available, the Weighted Average Call Rate (WACR)
– the average interest rate at which banks lend to each other overnight – declined and hovered
close to the repo rate, which is the interest rate at which the RBI lends money to commercial
banks. This indicates stable short-term borrowing costs.

• Lower Funding Costs in Debt Market: The difference between interest rates on Commercial
Papers (CPs) and Certificates of Deposit (CDs) – short-term borrowing instruments used by
companies and banks – and the 91-day Treasury Bill – a short-term government security –
reduced. This narrowing of spreads means that borrowing became cheaper in financial markets.
The RBI has stated it will continue to monitor these conditions and take action as needed to
maintain sufficient liquidity.

Conclusion

The Monetary Policy Report of April 2025, released alongside the 54th meeting of the Monetary Policy
Committee, reflects a balanced approach by the Reserve Bank of India (RBI) to support growth while
maintaining price stability. The decision to cut the policy repo rate by 25 basis points to 6 per cent is
underpinned by easing inflation, particularly in food prices, and a gradual recovery in economic activity.
With GDP growth for 2025–26 projected at 6.5 per cent and inflation expected to remain within the 4 per
cent target band, the report signals cautious optimism despite global uncertainties.

On the external front, robust services exports and strong remittance inflows have helped cushion the
merchandise trade deficit, keeping the current account deficit at sustainable levels. Meanwhile, improved
system liquidity, lower short-term borrowing costs, and stable foreign exchange reserves underscore the
resilience of India’s financial system. The RBI has affirmed its commitment to closely monitor evolving
conditions and take timely, calibrated measures to preserve macroeconomic and financial stability.

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