The Reserve Bank of India (RBI) on Monday doubled down on its liquidity injection measures for the banking system by announcing measures such as a $5 billion USD/INR buy/Sell swap auction of six months tenor and open market operation (OMO) purchase auctions of G-Secs aggregating ₹60,000 crore.

The central bank also announced a 56-day variable rate repo (VRR) auction for a notified amount of ₹50,000 crore. This will probably be the first time that a VRR auction for such a long tenor will be conducted.

The aforementioned measures could lead to liquidity infusion of about ₹1.50 lakh crore for the banking system in a phased manner, beginning (on January 30)and ending (on February 20) with OMO purchase auction. They will also have a softening effect on the yields of Government securities (G-Secs)

This comes amid liquidity tightness in the banking system. This has arisen due to tax outflows and limited government spending. The liquidity deficit is estimated at about ₹3 lakh crore.

To ease liquidity tightness in the banking system, the Reserve Bank of India started conducting daily Variable Rate Repo (VRR) auctions with effect from January 16. These auctions will be conducted until further notice.

The RBI said it will conduct USD/INR Buy/Sell Swap auction of $5 billion for a tenor of six months to be held on January 31, 2025.

What this means is that in the first leg of the aforementioned swap transaction, banks will sell US dollars to the RBI. The RBI will credit the rupee funds to the current accounts of the successful bidders. In the reverse leg of the swap transaction, Rupee funds will be returned to RBI along with the swap premium to get the US Dollars back after six months.

The RBI last conducted a USD/INR Buy/Sell Swap auction on March 26, 2019. Then the swap was for $5 billion for three years.

OMO purchase

The central bank will be conducting OMO purchase auctions of G-Secs for an aggregate amount of ₹60,000 crore in three tranches of ₹20,000 crore each. The auctions will be held on January 30, February 13, and February 20.

Further, it will conduct a 56-day Variable Rate Repo (VRR) auction for a notified amount of ₹50,000 crore to be held on February 7, 2025

The central bank said it will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions.

Published on January 27, 2025