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

The Reserve Bank of India (RBI) on Tuesday announced a fresh round of liquidity support measures, including open market operations (OMOs) and foreign exchange buy-sell swap, under which it will inject nearly Rs 3 lakh crore into the banking system. The central bank said it would purchase 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. Additionally, the RBI will conduct a three-year USD/INR buy-sell swap of $10 billion on January 13.

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

The main 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 early tax outflows and increases in currency in circulation. Last week, the RBI sold dollars aggressively to curb the sharp depreciation of the rupee, which had come under pressure amid uncertainty over a possible trade deal with the United States and sustained outflows of foreign portfolio investors (FPIs) from equity and debt markets. The intervention allowed the rupee to strengthen from around 91 to the dollar to 89, but also absorbed rupee liquidity from the system.

The RBI had earlier reassured markets about its liquidity stance. In the recent monetary policy meeting, Governor Sanjay Malhotra said the central bank would ensure adequate liquidity in the system even without explicitly targeting a surplus of around 1% in net demand and forward liabilities (NDTL).

So far in December, the central bank has injected Rs 1.45 lakh of sustainable liquidity through open market purchases and foreign exchange buy-sell swaps. Bond market participants noted that OMO purchases of more liquid securities would strengthen participation and improve price discovery, as illiquid bond trades often exceed prevailing market levels by 2 to 5 basis points, reducing their overall effectiveness.

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

Bond market participants welcomed OMO’s plans, but stressed the importance of making purchases of liquid securities to improve participation and price discovery. OMOs on illiquid bonds often offset at higher yields, reducing their effectiveness. So far in December, the RBI has injected Rs 1.45 lakh crore of sustainable liquidity through OMOs and foreign exchange swaps.

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