RBI Injects ₹2 Lakh Crore to Ease Banking Cash Crunch

RBI Steps In to Stabilize Financial System

The Reserve Bank of India (RBI) has announced a significant liquidity infusion of ₹2 lakh crore into the banking system. This proactive measure is designed to address a temporary cash shortage triggered by substantial outflows towards advance tax and Goods and Services Tax (GST) payments. By ensuring sufficient funds are available, the central bank aims to maintain stability in the money markets and prevent short-term interest rates from rising sharply.

The Mechanics of the Liquidity Injection

The RBI will employ a two-pronged strategy to pump funds into the system. The primary method involves Open Market Operations (OMOs), specifically the purchase of government bonds from commercial banks. This operation will be conducted in four separate tranches, each amounting to ₹50,000 crore. These bond purchase auctions are scheduled for December 29, January 5, January 12, and January 22. When the RBI buys these bonds, it pays the banks in rupees, directly increasing the cash reserves available within the banking system.

In addition to the bond purchases, the central bank has planned a $10 billion USD/INR currency swap for January 13, 2026. Through this mechanism, the RBI will provide rupees to banks in exchange for US dollars, with an agreement to reverse the transaction at a future date. This tool allows the RBI to inject rupee liquidity without permanently depleting its foreign exchange reserves, offering a flexible way to manage short-term cash requirements.

Why This Intervention is Necessary

The banking system has recently faced a significant liquidity deficit, estimated by some analysts to be as high as ₹3 lakh crore. This crunch is primarily attributed to two factors. First, periodic large payments, such as advance taxes and GST, pull a substantial amount of money out of the banking system and transfer it to the government. Second, the RBI's own actions to stabilize the rupee by selling US dollars in the foreign exchange market have inadvertently absorbed rupee liquidity from the system.

When liquidity tightens, the cost of short-term borrowing for banks, known as the call money rate, tends to rise. If left unchecked, these higher costs can be passed on to businesses and consumers, hindering economic activity. The RBI's intervention is timed to counteract these pressures and ensure that credit remains available at stable rates.

Summary of RBI's Liquidity Measures

To provide a clear overview, the key actions announced by the RBI are summarized below:

Market Impact and Economic Implications

The injection of ₹2 lakh crore is expected to have a cooling effect on overnight and short-term government security yields, which serve as benchmarks for corporate borrowing costs. A surplus in liquidity generally leads to lower short-term rates, making it cheaper for companies to access funds for working capital and expansion. This move also supports the effective transmission of the RBI's monetary policy, ensuring that any policy rate cuts are felt throughout the economy.

For banks, the added liquidity provides the necessary resources to meet the increased demand for credit that typically occurs towards the end of the year due to festive spending and corporate activities. For the broader economy, it ensures that the wheels of commerce continue to turn smoothly without being constrained by a lack of available funds.

A Shift in Liquidity Management Strategy

This recent intervention is part of a broader evolution in the RBI's approach to liquidity management. The central bank has been in discussions with market participants about revising its liquidity framework to provide greater transparency and predictability. There is an expectation that the RBI may shift towards using a seven-day variable rate repo (VRR) as its main operational tool, which offers more flexibility than the longer-tenure operations used previously.

Furthermore, there are discussions about reintroducing a fixed-rate repo facility and establishing a new benchmark, the Secured Overnight Reference Rate (SORR), to replace the less representative Mumbai Interbank Offered Rate (MIBOR). These potential changes indicate a move towards a more dynamic and responsive liquidity management policy.

Conclusion: A Proactive Stance on Financial Stability

The RBI's decision to inject ₹2 lakh crore underscores its commitment to maintaining financial stability and supporting economic growth. By proactively addressing the liquidity deficit, the central bank is preventing potential disruptions in the credit market and ensuring that the financial system remains resilient. The RBI has affirmed that it will continue to monitor market conditions closely and take further measures as needed to ensure orderly conditions prevail.