The Reserve Bank of India (RBI) has injected liquidity – durable and transient – aggregating about ₹15.5 lakh crore into the banking system in the last couple of months to help overcome funds crunch and support credit growth.
The tight liquidity situation in the banking system arose due to RBI’s foreign exchange market interventions (sale of dollars, which sucks out rupee liquidity) to curb excessive volatility in the rupee’s movement against the dollar, government tax flow dynamics, currency leakages and foreign portfolio investor (FPI) outflows.
So far in Q4FY25, the Reserve Bank has injected around ₹5.5 lakh crore of durable liquidity into the banking system through a combination of OMO (open market operation) purchases, longer-duration VRR (variable repo rate) auctions and forex (US Dollar/Indian Rupee Buy/Sell) swaps, according to RBI’s latest monthly bulletin.
Steps taken
Furthermore, the RBI has been conducting daily VRR auctions since January 16 to tide over transient liquidity tightness, with standalone primary dealers (SPDs) being allowed to participate in these daily auctions.
An aggregate amount of ₹9.68 lakh crore was injected into the banking system through two main and twenty-two fine-tuning VRR operations of maturities ranging from 1 to 8 days during February 16 to March 17, 2025, per the bulletin.
OMO-purchase entails purchase of Government Securities (G-Secs) by RBI from Banks to infuse durable liquidity. VRR auction involves Banks placing G-Secs as collateral with RBI and drawing short-term (transient) liquidity. A dollar/rupee buy/sell swap auction involves banks selling dollars to the RBI in the first leg. In the reverse leg, rupee funds are returned to the RBI along with the swap premium to get the dollars back after the prescribed swap tenor.”
System liquidity remained in deficit in the latter half of February and early March (up to March 13, 2025) amidst the seasonal pick-up in currency in circulation (CiC).
RBI noted that the slew of measures undertaken by it aided in moderating the liquidity deficit.
Liquidity deficit
Consequently, the average daily net injection under the liquidity adjustment facility (LAF) stood at ₹1.41 lakh crore during February 16 to March 13, 2025, as compared to ₹1.92 lakh crore during January 16 to February 15, 2025.
The liquidity deficit in the banking system had peaked to ₹3.15 lakh crore on January 23. As on March 18, liquidity deficit stood at ₹2.26 lakh crore.
RBI said, despite prevailing liquidity deficit, banks’ placement of funds under the standing deposit facility (SDF) averaged ₹1.15 lakh crore between February 16 and March 13, higher than ₹0.85 lakh crore in the previous month. Under SDF, Banks’ deploy surplus funds with RBI.
The Central bank observed that the co-existence of deficit liquidity conditions and substantial fund placements under the SDF suggests the asymmetric distribution of liquidity within the banking system as well as increased liquidity preference on the part of banks.