New Delhi, Mar 6 (KNN) The Reserve Bank of India (RBI) unveiled new measures on Wednesday designed to alleviate the persistent liquidity constraints affecting the banking system.
These initiatives include the purchase of government bonds through open market operations (OMO) and foreign currency swaps, implemented following “a review of current and evolving liquidity conditions,” according to the central bank’s official release.
The announced open market operations will involve RBI purchasing government securities valued at Rs 1 trillion, to be conducted in two separate tranches of Rs 50,000 crore each. These auctions are scheduled for March 12 and March 18, respectively.
Additionally, the central bank plans to conduct a buy/sell USD/INR currency swap auction amounting to USD 10 billion for a 36-month tenor on March 24.
The central bank indicated that detailed instructions for each operation would be issued separately, adding that it would “continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions.”
These interventions come amid a prolonged period of deficit liquidity in the banking system, which has resulted in a cash crunch for lenders and hindered the transmission of the RBI’s recent repo rate cut. The central bank had reduced the policy repo rate by 25 basis points on February 7.
System liquidity has deteriorated significantly in recent months, transitioning from a surplus of Rs 1.35 trillion in November 2024 to a deficit of Rs 65,000 crore in December.
This deficit further expanded to Rs 2.1 trillion in January 2025 before moderating slightly to approximately Rs 1.6 trillion in February.
According to a March 4, 2025 research report from the State Bank of India titled ‘Systemic Liquidity needs Flexible Targeting of Permanent Nature,’ the tightness has been attributed to various factors including tax outflows, forex market intervention, and volatility in capital flows.
The implementation of the Just in Time (JIT) approach has also affected system liquidity through fluctuations in government cash balances.
The JIT liquidity approach represents a system whereby the Union government disburses funds to states and implementing agencies only when required, rather than in advance. This methodology aims to minimise idle cash in bank accounts and optimise the utilisation of government funds.
The SBI report observed that “the unspent cash balance of the government is now being auctioned by the RBI through repos, and has its limitation in terms of amount and tenor.
The report highlighted an “urgent need” to reconsider the RBI’s existing liquidity management framework by replacing the weighted average call rate (WACR) as a policy rate, arguing that “it does not serve the intended purpose.”
The report estimated the gap in open market operations at Rs 1.7 trillion for FY26 and proposed that the RBI could utilise the cash reserve ratio (CRR) more as a regulatory intervention tool or countercyclical liquidity buffer rather than as a liquidity management instrument in the future.
The CRR, currently fixed at 4 percent, represents the percentage of total deposits that banks must maintain with the RBI as cash.
The RBI had previously introduced a series of liquidity measures on January 27, which included open market operations involving the purchase of government securities worth Rs 60,000 crore in three installments of Rs 20,000 crore each.
Alongside a USD 5 billion swap, the regulator announced a 56-day variable rate repo auction for Rs 50,000 crore.
Subsequently, it announced a three-year buy/sell dollar/rupee swap auction on February 21 valued at USD 10 billion to address the “durable liquidity needs of the system.”
(KNN Bureau)
