Overview of RBI's Actions

The Reserve Bank of India (RBI) has recently announced several measures to inject additional liquidity into the banking system, primarily through Open Market Operations (OMO) purchases and USD/INR Buy/Sell swap auctions. These actions are aimed at addressing the liquidity deficit that has been affecting the Indian banking system.

Open Market Operations (OMO) Purchases

• Amount and Schedule: The RBI plans to conduct two OMO purchase auctions of Government of India securities, each worth ₹50,000 crore. These auctions are scheduled for March 12 and March 18, 2025, totalling ₹1 lakh crore.

• Objective: The primary goal of these OMO purchases is to inject liquidity into the banking system by buying government securities from banks. This increases the cash reserves of banks, enabling them to lend more and support economic activity.

USD/INR Buy/Sell Swap Auctions

• Amount and Tenor: The RBI will conduct a USD/INR Buy/Sell Swap auction worth $10 billion with a tenor of 36 months on March 24, 2025.

• Objective: This swap aims to provide long-term liquidity to the banking system. It involves the RBI buying dollars from banks in exchange for rupees, which can be reversed after 36 months. This helps stabilise the foreign exchange market and supports the rupee by providing additional liquidity to banks.

Context and Rationale

The RBI's actions are in response to a significant liquidity deficit in the banking system. This deficit has been exacerbated by factors such as tax outflows, reduced government spending, and foreign portfolio investors' heavy selling of Indian equities. The RBI has been actively managing liquidity conditions, and these measures are part of its broader strategy to ensure orderly liquidity conditions and maintain financial stability.

Previous Measures

In recent months, the RBI has taken several other steps to address liquidity issues:

• Variable Rate Repo (VRR) Auctions: The RBI conducted VRR auctions to provide short-term liquidity.

• USD/INR Swaps: Earlier, a $5 billion USD/INR swap with a six-month tenor was conducted to inject liquidity.

• Government Bond Buy-Backs: The RBI also conducted OMO purchases of government securities worth ₹60,000 crore in January and February 2025.

Impact and Future Outlook

These liquidity injection measures are expected to ease the liquidity crunch, support economic growth, and potentially pave the way for future policy rate adjustments. The RBI continues to monitor liquidity conditions closely and is prepared to take additional measures as needed to maintain financial stability.

Overall, the RBI's strategy involves a combination of short-term and long-term liquidity measures to stabilise the financial system and support economic recovery.

Source: https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR23053DFD9A365B2545A9B9F65F7D024D2B1C.PDF