India's Central Bank Injects $13 Billion to Stabilize Financial Markets.
To address liquidity shortages and stabilise financial markets, the Reserve Bank of India (RBI) on Monday unveiled a multi-pronged strategy worth over Rs 1.1 lakh crore ($13 billion).
The measures are aimed at injecting funds into the banking system including bond purchases, repo auctions, and a dollar-rupee swap, signaling the central bank’s proactive stance amid tightening cash conditions.
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Key Liquidity Measures
1. OMO Bond Purchases:
The RBI will conduct three rounds of Open Market Operations (OMO) to buy government securities worth Rs 60,000 crore. These auctions, scheduled for January 30, February 13, and February 20, will inject Rs 20,000 crore each into the system. This marks the first such coordinated OMO action since 2023.
2. 56-Day Repo Auction:
A Variable Rate Repo (VRR) auction of Rs 50,000 crore will be held on February 7, allowing banks to borrow funds for 56 days to meet short-term liquidity needs.
3. Dollar Swap Facility:
A USD/INR buy-sell swap auction of $5 billion (Rs 41,500 crore) will be conducted on January 31 to infuse rupee liquidity for six months, cushioning foreign exchange volatility.
The RBI said that these steps are “targeted interventions” to ensure smooth liquidity flow and pledged to “closely monitor market dynamics” for further action.
India’s banking system has been in a plight of liquidity deficit since late 2024 which is driven by higher cash withdrawals during the festive season, tax outflows, and credit growth.
The durable cash available with banks had dipped to a deficit of Rs 80,000 crore, straining short-term lending rates and complicating monetary policy transmission.
Rajeev Radhakrishnan, Chief Investment Officer (Fixed Income) at SBI Mutual Fund said, as India Today quoted, “The RBI’s measures address both immediate and structural liquidity gaps. The OMOs and repo auctions could add Rs 1.1 lakh crore to the system, easing pressure on borrowing costs.
He highlighted that previous steps, like February’s Cash Reserve Ratio (CRR) cut and daily VRR auctions had only provided temporary relief.
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Economists and market analysts welcomed the RBI’s decisive steps but cautioned that more measures may follow.
Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, stated as quoted by India Today “While these moves align with market expectations, persistent liquidity stress could push the RBI to consider a repo rate cut as early as February’s policy review”
The repo rate, currently at 6.5%, has remained unchanged since April 2023. A reduction would lower borrowing costs for businesses and households, spurring economic activity amid slowing global growth.
However, challenges persist. Inflation, though within the RBI’s 4-6% target band, remains sticky due to food price volatility. Global factors like elevated oil prices and geopolitical tensions also pose risks.
All eyes are now on the RBI’s Monetary Policy Committee (MPC) meeting in February. With liquidity conditions improving, analysts anticipate a potential shift in policy tone. Meanwhile, the RBI has assured markets of its “commitment to ensuring orderly liquidity conditions,” with further interventions likely if deficits persist.
