The Reserve Bank of India (RBI) has announced a significant liquidity infusion plan worth nearly ₹1.5 lakh crore into the banking system. This move is designed to provide immediate relief and ensure that its recent interest rate cut is effectively passed on to borrowers. However, financial analysts caution that this substantial injection may only offer temporary respite, with further action potentially required in the final quarter of the current fiscal year.
Details of the Liquidity Injection Plan
The central bank has signalled its intention to maintain surplus liquidity at a level equivalent to 1% of total bank deposits. This translates to a requirement of approximately ₹2.4 lakh crore. To work towards this target, the RBI will deploy a two-pronged strategy. A portion of the funds will come from bond buybacks, known as Open Market Operations (OMO) purchases, amounting to ₹1 lakh crore.
The remaining liquidity will be generated through a unique $5 billion dollar-rupee buy/sell swap auction. In this mechanism, the RBI will buy US dollars from banks and commit to selling them back after three years at a predetermined rate. This specific swap, scheduled for December 16, 2025, is expected to add roughly ₹61,500 crore of durable rupee liquidity without causing a permanent reduction in the country's foreign exchange reserves.
Analysts Weigh In on Future Requirements
While the current measures are substantial, experts believe they might not be sufficient to address all underlying pressures. According to Madhavi Arora, an economist at Emkay Global, an additional infusion of ₹50,000 to ₹80,000 crore could still be necessary in the fourth quarter. The exact amount will depend on the scale of balance of payments pressures and the extent of the RBI's operations in the foreign exchange market to stabilise the rupee.
"Even so, this injection should meaningfully aid transmission, particularly as foreign exchange intervention is likely to continue, making the liquidity support especially timely and effective at this stage of the cycle," Arora noted. ICICI Securities pointed out that the announced measures were anticipated and suggested that a similar mix of actions could be announced again in the future to manage liquidity conditions.
Potential Consequences and Market Impact
The primary goal of this liquidity push is to ensure that the quarter-percentage point interest rate cut announced by the RBI translates into lower lending rates for borrowers and adjusted deposit rates for savers. However, the strategy carries nuanced implications. If the Indian rupee continues to face downward pressure against the US dollar, the central bank may need to utilise its forex reserves to curb excessive volatility. Such intervention would, in turn, drain liquidity from the banking system, creating a counteractive effect.
Furthermore, analysts predict that the increased rupee liquidity could lead to a modest short-term weakening of the currency. This is because higher liquidity tends to narrow the interest rate differential between India and the United States, potentially making rupee-denominated assets slightly less attractive in the immediate term. The RBI's calibrated approach aims to balance the need for growth-supportive liquidity with the imperative of maintaining macroeconomic stability.
