RBI to infuse ₹1.45 trillion liquidity through bond buys, dollar-rupee swaps

The Reserve Bank of India (RBI) will infuse about ₹1.45 trillion of liquidity into the banking system, governor Sanjay Malhotra said on Friday while announcing policy rate decisions.

This infusion will be through a mix of open market operation (OMO) purchases of ₹1 trillion and another ₹45,000 crore ($5 billion) through a three-year US dollar-rupee swap.

Under OMO purchases, the central bank buys government bonds from banks and, in turn, injects money into the banking system. On the other hand, foreign exchange swaps involve the RBI purchasing dollars from banks against rupees held by them, thus infusing liquidity into the system. It then sells back the dollars at a later date, in this case, three years.

The banking system's liquidity was at a surplus of ₹2.7 trillion on 4 December, compared to ₹2.6 trillion the previous day. Market experts said that the RBI had pointed out in April that liquidity at 1% of net demand and time liabilities (NDTL) or deposits is sufficient for the transmission of past rate cuts. However, over the last few months, banking system liquidity has been below 1% of NDTL.

Front loading

“Announcing a rate cut of 25 bps and maintaining a neutral stance along with ₹1 trillion OMO, RBI is perhaps once again front-loading its rate cut,” said Anitha Rangan, chief economist, RBL Bank.

Rangan said the OMO announcement perhaps suggests that the central bank is cognizant of G-sec (government securities) yields. In addition, the three-year forex swap suggests that RBI is aware of the FX risks; they have done swaps in the past, and there is a possibility of more support if required, said Rangan.

Despite the rate cut and liquidity measures, the market saw this as a dovish policy.

Churchil Bhatt, executive vice-president, investment, Kotak Mahindra Life Insurance Company, said that while RBI cut the repo rate by 25 basis points in a unanimous decision, keeping its stance neutral, it signalled a dovish bias given the growth-related uncertainty.

“Together, these measures are growth-supportive, and the evolving growth-inflation mix keeps the door open for one more rate cut. Financial conditions should therefore be supportive for rate transmission and for bond market sentiment,” said Bhatt.

The surprise strong real gross domestic product (GDP) print in the September quarter had earlier raised doubts over the possibility of a rate cut in December.

The RBI governor on Friday said growth, while remaining resilient, is expected to soften somewhat. The six-member MPC raised its GDP forecast to 7.3% from 6.8% previously.

“…the growth-inflation balance, especially the benign inflation outlook on both headline and core, continues to provide the policy space to support the growth momentum,” he said.

The rate-setting panel reduced its CPI inflation projection for 2025-26 to 2%, down from 2.6% previously, and raised its GDP forecast to 7.3% from 6.8%.

Madhavi Arora, chief economist at Emkay Global Financial said the primary liquidity infusion of around ₹1.45 trillion is constructive but "modestly below" the expectation of ₹2 trillion for the rest of FY26.

"We reiterate rupee’s softness should not be read as rate-easing deterrent ahead, but a natural growth stabiliser," she said.

Positive for NBFCs

Non-bank financiers see easier financial conditions as a result of RBI’s liquidity measures. Shilpa Bhatter, chief financial officer, UGRO Capital said that the announcements of OMOs and the dollar-rupee swap will further soften funding conditions, which is positive for non-banking financial companies and will enhance the flow of credit to small businesses.

RBI has been encouraging NBFCs to explore funding sources beyond banks. Per RBI data, NBFC borrowings from banks had moderated from 43.1% of their total funding at end-March 2023, to 42.7% a year later.