RBI Injects ₹2.5 Lakh Crore to Strengthen Banking Liquidity

The Reserve Bank of India (RBI) has announced a significant liquidity infusion of ₹2.5 lakh crore into the banking system through a Variable Rate Repo (VRR) auction. This move is aimed at addressing the current liquidity shortfall in the financial system, which has been impacted by various economic factors. The liquidity support will help stabilize the banking sector, ensuring the smooth flow of credit and preventing any major disruptions in financial markets.

Why is RBI injecting ₹2.5 lakh crore into the banking system?

The RBI’s decision to inject this large sum stems from growing liquidity concerns in the banking system. Several factors have contributed to the shortage of liquidity, including:

• Foreign Exchange Market Interventions – The RBI has been actively intervening in the forex market to stabilize the weakening rupee. This has led to a significant drain on rupee liquidity.
• Fiscal Outflows – Government-related fiscal transactions, including tax payments and public sector spending, have further tightened liquidity conditions.
• Economic Growth Concerns – The RBI aims to maintain financial stability while ensuring credit availability for businesses and consumers.

The liquidity support through the VRR mechanism will help banks maintain a healthy balance sheet and continue lending to industries, ensuring economic growth momentum is sustained.

How will the RBI conduct the liquidity injection?

To manage this liquidity infusion efficiently, the RBI has planned daily Variable Rate Repo (VRR) auctions in Mumbai on all working days. These auctions allow banks to borrow funds at variable interest rates for short-term liquidity needs. Key points of this mechanism include:

• Daily Auctions – The RBI will conduct these auctions regularly to keep liquidity conditions stable.
• Short-Term Reversals – Borrowed funds will be reversed the next working day, ensuring flexibility in liquidity management.
• Market-Based Rates – The VRR ensures that funds are injected into the system based on market-determined interest rates, preventing excessive liquidity build-up.

What does this mean for monetary policy and future actions?

This liquidity injection aligns with the RBI’s recent monetary policy stance. Key related actions include:

• Repo Rate Cut – The RBI recently reduced the key repo rate by 25 basis points to 6.25%, marking the first cut since May 2020.
• Increased Bond Purchases – The RBI has also doubled its bond-buying program to ₹40,000 crore to support liquidity.
• Regulatory Adjustments – The central bank has deferred the implementation of the Liquidity Coverage Ratio (LCR) and project financing norms by a year, with the new deadline set for March 31, 2026.

Experts believe that the RBI may take additional steps, such as Open Market Operations (OMO) or forex swaps, if liquidity shortages persist, particularly toward the end of the financial year.

Summary of the news