The Reserve Bank of India (RBI) on Tuesday announced a fresh set of measures to ease tight liquidity conditions in the banking system, unveiling a plan to inject nearly ₹3 trillion over the coming weeks through a combination of open market operations (OMOs) and a foreign exchange swap.
Under the proposed plan, the central bank will purchase government securities worth ₹2 trillion through OMOs. These purchases will be conducted in four equal tranches of ₹50,000 crore each on December 29, January 5, January 12 and January 22.
In addition, the RBI will undertake a three-year USD/INR buy-sell swap of $10 billion on January 13, a move expected to further release rupee liquidity into the banking system.
Market participants said the large-scale liquidity injection was widely anticipated, particularly after the RBI’s recent intervention in the foreign exchange market. Last week, the central bank sold dollars aggressively to curb volatility in the rupee, which had come under pressure amid uncertainty over a potential trade agreement with the United States and continued foreign portfolio investor outflows from Indian equity and debt markets.
Analysts noted that the RBI’s currency market intervention had tightened rupee liquidity, making the latest measures timely. They added that further steps would depend on how liquidity conditions evolve and whether additional foreign exchange intervention becomes necessary in the coming weeks.
During the recent monetary policy meeting, RBI Governor Sanjay Malhotra had assured markets that the central bank would ensure adequate liquidity in the financial system. He had indicated that liquidity support would continue even without formally targeting a surplus level of around one per cent of net demand and time liabilities.
So far in December, the RBI has already injected about ₹1.45 trillion of durable liquidity through a combination of bond purchases and foreign exchange swaps.
Bond market participants said that conducting OMOs in more liquid government securities would improve participation and aid better price discovery. They noted that the use of illiquid bonds often leads banks to bid at elevated levels to secure gains, reducing the overall effectiveness of such operations.
Earlier this year, the RBI had undertaken even larger liquidity support measures. In the first half of the current calendar year, the central bank injected around ₹9.5 trillion into the banking system through open market purchases, long-term repo operations and USD/INR buy-sell swaps.
-IANS
