RBI to inject Rs 290,000 crore liquidity via securities purchase, swap auction

The primary objective is to add durable liquidity without permanently expanding the RBI’s balance sheet which helps to keep short-term interest rates aligned with the policy corridor. By absorbing dollars temporarily, the RBI can smooth excessive forex market volatility.

The liquidity injection is expected to accelerate policy rate transmission and spur credit offtake. As liquidity rises, banks have more lendable resources, which typically pulls down short-term interest rates, keeps overnight rates aligned with the policy rate, and softens bond yields.

“In view of the evolving liquidity conditions and the outlook, the RBI has decided to conduct OMO purchases of government securities of Rs 1,00,000 crore and a three-year USD/INR buy sell swap of $5 billion this month to inject durable liquidity into the system,” RBI Governor Sanjay Malhotra said while unveiling the monetary policy earlier this month.

With surplus funds, banks become more willing to extend credit, improving loan flows to corporates, MSMEs and households, and thereby supporting investment and consumption. The RBI cut the policy repo rate by 25 basis points, bringing it down to 5.25 per cent in the December policy review.

While the objective of purchase (sale) under OMO is to provide (absorb) durable liquidity, the purpose of repo operations is to manage transient liquidity so as to align the operating target — the Weighted Average Call Rate (WACR) — to the policy repo rate. “So, it is quite possible that we inject durable liquidity through purchase of government securities under OMO on the one hand while simultaneously withdrawing transient liquidity through a VRRR (Variable Rate Reverse Repo) operation on the other hand,” Malhotra said.