The Reserve Bank of India (RBI) on Wednesday announced open market operation (OMO) purchases and a $10-billion dollar-rupee swap auction that together are expected to inject an additional Rs 1.9-lakh-crore liquidity in the banking system. The move comes even as the systemic liquidity deficit eased to Rs 20,000 crore on March 4, the lowest level in nearly two months, from Rs 1.10 lakh crore on March 3.
The apex bank will conduct OMO purchases of government securities worth Rs 1 lakh crore in two equal tranches. Auctions will be held on March 12 and 18.
“USD/INR buy/sell swap auction of $10 billion for a tenure of thirty-six months to be held on March 24, 2025,” the RBI said in a statement, adding that it “will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions”.
This will be the third dollar-rupee swap auction by the RBI in a month. The first auction of $5 billion for a tenure of six months was conducted on January 31 while the second auction of $10 billion was held on February 28. Though auctions have helped ease the deficit to some extent, experts say the relief from the cash squeeze is likely to be temporary as fund outflows, rupee volatility and tax payments may drain liquidity from the system.
“This decline in the liquidity deficit could be temporary. FII outflows are likely to persist due to concerns over high valuation of Indian stocks. These outflows will put pressure on the rupee, potentially prompting the RBI to intervene, which would further drain liquidity from the system,” said Madhavankutty G, chief economist at Canara Bank. “Additionally, outflows in the form of advance tax and GST payments will contribute to the liquidity strain.”
The deficit had breached Rs 3 lakh crore and touched Rs 3.15 lakh crore on January 11. It hovered between Rs 1.5 lakh crore and Rs 2 lakh crore in February following RBI measures.
Since mid-January, the RBI has been injecting funds to counter a sharp decline in liquidity, primarily driven by its aggressive interventions in the foreign exchange market.
The central bank had introduced several measures, including lowering cash reserve ratio (CRR), daily variable rate repo, long-term repo auction, forex swaps and OMO purchases, to ease the liquidity stress. In December, it had cut the CRR by 50 basis points, releasing Rs 1.16 lakh crore into the system. This was followed by daily variable rate repo (VRR) auctions, Rs 1 lakh crore in OMO purchases, a dollar-rupee buy/sell swap and a 56-day VRR auction.
“We are not expecting the liquidity deficit to remain high throughout this month. The rupee is likely to remain under pressure in near term and the RBI will not hesitate to defend the currency,” said the head of treasury of a private bank.
