The Reserve Bank of India (RBI) has infused Rs 15.5 lakh crore into the banking system over the past two months through a mix of durable and transient liquidity measures to address the ongoing liquidity deficit and support credit growth.
Despite these interventions, liquidity remains tight due to factors such as the central bank’s foreign exchange market interventions, government tax flow dynamics, currency leakages, and foreign portfolio investor (FPI) outflows.
RBI injected about Rs 5.5 lakh crore of durable liquidity in Q4FY25 through open market operation (OMO) purchases, longer-duration variable repo rate (VRR) auctions, and forex (USD/INR) buy/sell swaps. Additionally, from February 16 to March 17, 2025, the central bank conducted 22 fine-tuning VRR operations and two main VRR operations, injecting Rs 9.68 lakh crore into the system with maturities ranging from 1 to 8 days.
OMO purchases involve RBI buying government securities (G-Secs) from banks to provide durable liquidity, while VRR auctions allow banks to place G-Secs as collateral and draw short-term liquidity. In forex buy/sell swaps, banks sell dollars to the RBI initially and later repurchase them by returning rupee funds along with the swap premium after the swap tenor.
To manage transient liquidity tightness, RBI has been conducting daily VRR auctions since January 16, 2025, allowing standalone primary dealers (SPDs) to participate. This move is aimed at addressing short-term liquidity mismatches that have contributed to the tightness in the system.
Moderation in liquidity deficit
RBI’s measures have helped moderate the liquidity deficit, with the average daily net injection under the liquidity adjustment facility (LAF) reducing to Rs 1.41 lakh crore between February 16 and March 13, 2025, from Rs 1.92 lakh crore during January 16 to February 15, 2025. The liquidity deficit, which peaked at Rs 3.15 lakh crore on January 23, eased to Rs 2.26 lakh crore by March 18, 2025.
Despite prevailing liquidity tightness, banks’ placements of surplus funds under the standing deposit facility (SDF) averaged Rs 1.15 lakh crore between February 16 and March 13, higher than Rs 0.85 lakh crore in the previous month. Under SDF, banks park excess funds with RBI.
RBI observed that the co-existence of deficit liquidity conditions and substantial fund placements under the SDF suggests asymmetric liquidity distribution across the banking system, coupled with increased liquidity preference by banks.
