RBI’s Strategic Measures to Boost Liquidity in the Banking System

In a timely move to stabilize the financial system, the Reserve Bank of India (RBI) has introduced a series of liquidity-boosting measures. These include a $5 billion USD/INR buy/sell swap auction, open market operations (OMOs), and a variable rate repo (VRR) auction. The RBI’s efforts aim to alleviate liquidity constraints in the banking system and support economic stability.

Why did RBI announce the $5 billion Forex Swap Auction?

On January 31, 2025, the RBI conducted a USD/INR buy/sell swap auction worth $5 billion. The auction, designed to infuse liquidity into the banking system, aimed to ease the dollar shortage amid the falling rupee. The auction drew impressive demand, with bids amounting to $25.59 billion, oversubscribed five times by 253 participants. By selling $5 billion in dollars, the RBI plans to withdraw an equivalent amount of rupee liquidity, a step that is expected to provide much-needed relief. The swap, with a six-month maturity period, will help maintain financial stability as it helps banks manage their liquidity needs better.

How do Open Market Operations (OMOs) Play a Role?

To supplement the forex swap auction, the RBI has also announced plans for open market operations (OMOs) worth ₹60,000 crore in three parts. This includes purchases of government securities worth ₹20,000 crore each on January 30, February 13, and February 20, 2025. These OMOs are intended to inject additional liquidity into the banking system. By purchasing government securities, the RBI will increase the money supply, reducing the liquidity tightness that has been evident in recent times. OMOs are an important tool used by the central bank to ensure financial stability and smooth functioning of the money market.

What is the Importance of the Variable Rate Repo (VRR) Auction?

Additionally, the RBI is set to conduct a 56-day variable rate repo (VRR) auction worth ₹50,000 crore on February 7, 2025. This auction is aimed at injecting short-term liquidity into the banking system, especially addressing the current cash shortages that have been affecting money market conditions. The VRR auction will help ensure that banks have enough liquidity to carry out their operations smoothly. By offering liquidity through VRR, the RBI will support the stability of the money market, ensuring that short-term borrowing and lending needs are met effectively.

What Do These Measures Mean for the Banking System?

These measures come as a response to a liquidity deficit that has crossed ₹3 lakh crore in India’s banking system, a situation worsened by the RBI’s intervention to stabilize the rupee. The combined effect of these liquidity-boosting strategies is expected to infuse nearly ₹1.5 lakh crore into the system, which should ease the liquidity crunch. This move also signals the RBI’s commitment to maintaining financial stability amid challenging times. As liquidity conditions improve, these measures could have far-reaching effects on India’s monetary policy in the coming months.

Summary of the news