RBI to inject nearly Rs 3 lakh crore via OMOs to offset forex intervention impact

The Reserve Bank of India (RBI) on Tuesday announced a fresh round of liquidity support measures, including open market operations (OMOs) and forex swaps, under which it will infuse nearly Rs 3 lakh crore into the banking system. The central bank said it will buy government securities worth Rs 2 lakh crore through OMOs in four tranches of Rs 50,000 crore each, scheduled on December 29, January 5, January 12 and January 22. In addition, the Reserve Bank of India will conduct a three-year USD/INR call and put swap worth $10 billion on January 13.

This move comes at a time when liquidity conditions in the banking system have tightened. As per the latest data, the system’s net liquidity stood at a deficit of Rs 54,851 crore as of Monday. Market participants said the RBI’s action was widely expected, with liquidity infusion of at least Rs 2 lakh crore expected even before the central bank’s intervention in the foreign exchange market last week.

The primary objective of these measures is to compensate for liquidity drained by recent interventions in the foreign exchange market as well as seasonal pressures such as advance tax outflows and appreciation of the currency in circulation. Last week, the Reserve Bank of India aggressively sold dollars to curb a sharp decline in the value of the rupee, which has come under pressure amid uncertainty over a potential trade deal with the United States and continued outflows of foreign portfolio investors from equity and debt markets. The intervention helped the rupee rise from about 91 rupees to the dollar to 89, but it also sucked rupee liquidity out of the system.

The Reserve Bank of India had earlier reassured the markets about its liquidity position. In the recent monetary policy meeting, Governor Sanjay Malhotra said the central bank will ensure adequate liquidity in the system even without explicitly targeting a surplus of around 1% of net demand and time commitments (NDTL).

So far in December, the central bank has infused Rs 1.45 lakh of standing liquidity through open market purchases and foreign exchange call and swap swaps. Bond market participants noted that OMO purchases in more liquid securities would enhance participation and improve price discovery, as operations in illiquid bonds often run 2 to 5 basis points above prevailing market levels, reducing their overall effectiveness.

During the first half of 2025, the RBI injected Rs 9.5 lakh crore of standing liquidity into the banking system, helping to turn conditions from a prolonged deficit since mid-December 2024 to a surplus by the end of March 2025. Of this total, Rs 5.2 lakh crore was provided through open market operations, while long-term repo auctions with variable interest rates and USD/INR call-sell swaps contributed. 2.1 lakh crore and Rs 2.2 lakh crore respectively.

Bond market participants welcomed the OMO plans but stressed the importance of making purchases in liquid securities to improve participation and price discovery. OMOs in illiquid bonds are often liquidated at higher yields, which reduces their effectiveness. So far in December, the RBI has infused Rs 1.45 lakh crore of standing liquidity through OMOs and FX swaps.

Despite these measures, government bond yields continued to rise. The benchmark 10-year yield has risen by 12 basis points since the repo rate was cut by 25 basis points earlier this month, highlighting the weakness in transmission. With the cash reserve ratio tool largely exhausted, OMOs remain the RBI’s primary lever to counter liquidity tightening caused by foreign exchange market intervention.