RBI to Inject Rs 3 Trillion Liquidity via OMOs and Forex Swaps

Introduction to RBI's Liquidity Measures

The Reserve Bank of India (RBI) has announced a significant intervention to address tightening liquidity in the nation's banking system. The central bank plans to inject nearly Rs 3 trillion through a combination of open market operations (OMOs) and a US dollar-Indian rupee (USD/INR) buy-sell swap. This move is aimed at easing financial conditions that have been strained by recent market developments and seasonal fund outflows.

The Rationale Behind the Intervention

The banking system has been experiencing a liquidity crunch, with the net liquidity position showing a deficit of Rs 54,851 crore as of early this week. This tightness is attributed to several factors. Primarily, the RBI's recent aggressive intervention in the foreign exchange market to stabilize the rupee led to a substantial drain of rupee liquidity. The central bank sold dollars to prevent the rupee's sharp depreciation, which had been under pressure from foreign portfolio investor (FPI) outflows and global economic uncertainties. Additionally, seasonal factors such as advance tax payments by corporations and a higher demand for currency in circulation have further contributed to the deficit.

A Detailed Look at the Proposed Measures

The RBI has outlined a two-pronged strategy to infuse funds into the system. The first part involves the purchase of government securities (G-secs) through OMOs, amounting to Rs 2 trillion. These purchases will be conducted in four equal tranches of Rs 50,000 crore each. The second measure is a three-year USD/INR buy-sell swap auction for $10 billion. This is designed to provide rupee liquidity while also managing foreign exchange market dynamics.

Open Market Operations (OMOs) Explained

Open Market Operations are a key tool used by the RBI to manage systemic liquidity. In an OMO purchase, the central bank buys government bonds from commercial banks in the open market. By doing so, it pays the banks in rupees, thereby increasing the amount of money available in the banking system. This injection of 'durable liquidity' helps banks meet their lending and reserve requirements more comfortably. The scheduled OMOs are set for December 29, January 5, January 12, and January 22, providing a staggered but consistent infusion of funds.

Understanding the USD/INR Forex Swap

The $10 billion forex swap, scheduled for January 13, is another strategic instrument. In this transaction, the RBI will buy US dollars from banks in exchange for rupees at the current spot rate. Simultaneously, it enters into a forward contract to sell the same amount of US dollars back to the banks at a future date (in this case, after three years). This action immediately injects rupee liquidity into the system. The key advantage is that it does so without permanently depleting the country's foreign exchange reserves, as the dollars are scheduled to be returned to the RBI.

Summary of RBI's Liquidity Injection Plan

Market Reaction and Expert Analysis

Market participants were anticipating a substantial liquidity injection, with expectations hovering around at least Rs 2 trillion even before the recent forex interventions. The RBI's announcement of nearly Rs 3 trillion is therefore seen as a timely and adequate response. Sakshi Gupta, principal economist at HDFC Bank, noted that the amount appears appropriate given the scale of the forex intervention and that further support may be provided in the fourth quarter if needed. However, the impact on the bond market remains a key point of discussion. Despite previous liquidity measures and a repo rate cut, the yield on the benchmark 10-year government bond has risen by 12 basis points, indicating poor transmission. Experts like Indranil Pan, chief economist at Yes Bank, argue that the new measures are primarily a counter to the liquidity drain from forex intervention and may not have a meaningful impact on bringing down bond yields. This is because underlying fiscal concerns, including large government redemptions and potential additional borrowing by states, continue to exert upward pressure on yields.

The RBI's Official Stance on Liquidity

During the last monetary policy meeting, RBI Governor Sanjay Malhotra had already assured the markets of the central bank's commitment to maintaining ample liquidity. He clarified that the RBI would ensure sufficient funds are available in the system, even without explicitly targeting a surplus level of around 1% of net demand and time liabilities (NDTL). This proactive communication has helped manage market expectations. The latest actions align with this stated commitment to support financial stability and facilitate the transmission of monetary policy.

Historical Context of Liquidity Management

This is not the first time the RBI has stepped in with significant liquidity support. So far in December, the central bank has already infused Rs 1.45 trillion through OMOs and swaps. Looking at the broader picture, the RBI injected a massive Rs 9.5 trillion of durable liquidity in the first half of the current calendar year. That sustained effort successfully shifted the banking system's liquidity from a deficit, which had persisted since mid-December 2024, to a surplus by the end of March 2025. These past actions demonstrate the RBI's willingness to use its full range of tools to manage evolving economic conditions.

Conclusion and Forward Outlook

The RBI's decision to inject Rs 3 trillion is a decisive step to stabilize the banking system's liquidity and counteract the effects of its currency market interventions. The combination of OMOs and a forex swap provides a balanced approach to managing both domestic liquidity and foreign exchange dynamics. While the measures are expected to ease immediate pressures, the long-term impact on bond yields will depend on broader fiscal conditions and government borrowing programs. The market will continue to monitor liquidity conditions closely, with the understanding that the RBI remains prepared to act further if pressures persist.