Economy & Finance

RBI Unveils ₹1.5 Lakh Crore Liquidity Boost to Ease Banking System Strain

In response to mounting liquidity pressure in India’s banking system, the Reserve Bank of India (RBI) has launched a series of targeted interventions to infuse ₹1.5 lakh crore into the economy. The measures, rolled out between January 30 and February 20, 2025, are designed to mitigate liquidity deficits caused by tax outflows and muted government spending, while ensuring smooth financial operations in the lead-up to March.

💰 Key Measures Announced

• $5 billion USD/INR Buy/Sell Swap Auction
  • Tenor: 6 months
  • Banks sell US dollars to RBI and receive rupees, which are returned later with a swap premium.
• Open Market Operations (OMOs)
  • Government securities purchase worth ₹60,000 crore in three tranches:
    • Jan 30
    • Feb 13
    • Feb 20
  • Aim: Boost liquidity and stabilise bond yields.
• 56-Day Variable Rate Repo (VRR) Auction
  • Amount: ₹50,000 crore
  • Scheduled for: Feb 7
  • Allows banks to borrow funds against collateralized G-Secs at market-based interest rates.

🔄 How the USD/INR Swap Works

• Banks sell dollars to RBI, receiving rupees in return.
• After six months, banks repurchase their dollars by returning the rupees with an added premium.
• This tool injects liquidity without directly impacting forex reserves, offering short-term currency stability.

📉 Effect on Interest Rates and Bonds

• Bond yields have dropped to a three-year low amid expectations of further easing.
• Economists suggest these liquidity injections could pave the way for a repo rate cut.
• The Monetary Policy Committee (MPC) is set to meet in early February to review policy stance in light of these developments.

📊 Current Liquidity Outlook

• The liquidity deficit may peak at ₹4 lakh crore by March 2025.
• These interventions are preemptive steps to smoothen credit flows and prevent financial tightening.
• The RBI continues to closely monitor liquidity dynamics, ensuring conditions are supportive of economic expansion.