RBI’s Liquidity Injection Measures: A Step Toward Stability

Introduction

In a move to stabilise the Indian banking system, the Reserve Bank of India (RBI) has introduced a series of liquidity-boosting measures. With the liquidity deficit reaching record levels of over ₹3 lakh crore, these measures aim to ease liquidity pressures, moderate bond yields, and ensure orderly credit flow. Let’s break down these critical steps and their implications.

Key Measures Announced by RBI

1. Open Market Operations (OMO) Purchase Auctions

The RBI has announced the purchase of Government of India securities worth ₹60,000 crore, distributed over three tranches:

• Tranche 1: ₹20,000 crore on January 30, 2025
• Tranche 2: ₹20,000 crore on February 13, 2025
• Tranche 3: ₹20,000 crore on February 20, 2025

These OMOs aim to inject liquidity into the banking system and stabilise bond yields, benefitting both investors and borrowers.

2. Variable Rate Repo (VRR) Auction

A 56-day VRR auction for ₹50,000 crore will be conducted on February 7, 2025.

• This mechanism allows banks to access additional funds at variable rates, addressing short-term liquidity needs.

3. USD/INR Buy/Sell Swap Auction

The RBI has also announced a USD/INR buy/sell swap auction worth USD 5 billion for a tenure of six months on January 31, 2025.

• This step ensures sufficient forex liquidity and supports the Indian rupee in international markets.

Implications of These Measures

1. Easing Liquidity Pressures:
   The banking system’s liquidity deficit, the highest in over a decade, has raised concerns among market participants. By injecting funds, the RBI aims to alleviate these pressures and maintain stability.
2. Bond Market Stability:
   The OMO purchases are expected to moderate bond yields, making it easier for the government to raise funds and for businesses to access cheaper credit.
3. Support for Credit Flow:
   With banks facing tight liquidity due to evolving economic conditions and new liquidity norms, these measures ensure continued credit flow to support economic activity.
4. Forex Stability:
   The USD/INR swap auction will help manage forex reserves and stabilise the rupee, reducing import-related inflationary pressures

Relevant Case Law and Precedents

1. Dharani Sugars and Chemicals Ltd. v. Union of India (2019):
   The Supreme Court upheld RBI’s authority to implement liquidity-related measures. This precedent reinforces the importance of RBI’s proactive approach in managing financial stability.
2. All India Bank Officers’ Confederation v. Union of India (2020):
   Highlighted the importance of RBI’s role in ensuring adequate liquidity for banks to meet economic demands.

Conclusion

RBI’s recent liquidity measures are a well-timed intervention to address tightening liquidity conditions. By using tools like OMOs, VRR auctions, and forex swaps, the central bank aims to stabilise the financial system and ensure orderly credit flow. These measures underline RBI’s commitment to fostering economic growth while maintaining financial stability.