How RBI’s ₹15.5 Lakh Crore Liquidity Infusion is Keeping the Banking System Afloat

In recent months, the Reserve Bank of India (RBI) has taken significant steps to infuse liquidity into the banking system, addressing the growing concern over a funds crunch and supporting credit growth. According to the RBI’s latest monthly bulletin, the central bank injected approximately ₹15.5 lakh crore into the system over the past two months. This move is part of an ongoing strategy to manage liquidity fluctuations and ensure the smooth functioning of the financial markets.

Sources of Liquidity Tightness

Liquidity tightness has been a persistent issue in the Indian banking system. Several factors have contributed to this situation:

• Foreign Exchange Market Interventions: To curb excessive volatility in the rupee, the RBI intervenes in the foreign exchange market, buying and selling dollars. This process drains rupee liquidity from the banking system.

• Government Tax Flow Dynamics: The government’s tax inflows and outflows also influence liquidity, with periods of high tax payments leading to short-term liquidity strain.

• Currency Leakages and FPI Outflows: Another contributing factor has been the outflow of foreign portfolio investment (FPI) funds, which further exacerbates liquidity constraints.

Measures Taken by the RBI

To tackle the liquidity challenges, the RBI has implemented a series of measures, both durable and transient in nature. In the fourth quarter of FY25, the RBI injected ₹5.5 lakh crore of durable liquidity into the banking system. This was achieved through the following mechanisms:

• Open Market Operations (OMO): The RBI conducted purchases of Government Securities (G-Secs) from banks to infuse long-term liquidity into the system.

• Variable Repo Rate (VRR) Auctions: The RBI has been conducting VRR auctions, allowing banks to place G-Secs as collateral and draw short-term liquidity.

• Forex Swaps: The RBI also engaged in US Dollar/Indian Rupee buy/sell swaps, where banks sell dollars to the RBI, which then returns rupee funds with the swap premium after the agreed period.

Daily VRR Auctions and Their Impact

Since January 16, the RBI has been conducting daily VRR auctions to mitigate the transient liquidity tightness. These auctions have been pivotal in maintaining liquidity within the banking system. The RBI’s efforts included 2 main VRR operations and 22 fine-tuning operations, injecting a total of ₹9.68 lakh crore into the system between February 16 and March 17, 2025.

These VRR auctions, with maturities ranging from 1 to 8 days, have been crucial in addressing short-term liquidity challenges, ensuring that banks have access to sufficient funds to meet their immediate requirements.

Deficit and Surplus Liquidity Conditions

Despite the RBI’s efforts, liquidity deficit conditions persisted, particularly in the latter half of February and early March 2025. The seasonal uptick in currency in circulation (CiC) exacerbated the deficit during this period. However, the RBI’s intervention through various measures helped reduce the severity of the deficit.

• The average daily net injection under the Liquidity Adjustment Facility (LAF) stood at ₹1.41 lakh crore from February 16 to March 13, compared to ₹1.92 lakh crore during the previous month.

• The liquidity deficit reached a peak of ₹3.15 lakh crore on January 23, but by March 18, it had moderated to ₹2.26 lakh crore.

Standing Deposit Facility (SDF)

In addition to the liquidity interventions, the RBI has observed increased placements of funds by banks under the Standing Deposit Facility (SDF). Between February 16 and March 13, the average placement stood at ₹1.15 lakh crore, higher than ₹0.85 lakh crore in the previous month. This indicates a higher level of surplus funds within the banking system, which banks are depositing with the RBI rather than deploying in the market.

Conclusion

The RBI’s liquidity interventions have played a crucial role in stabilising the banking system amidst the challenges posed by liquidity tightness. While the liquidity deficit persists, the central bank’s ongoing efforts to manage it are proving to be effective in maintaining stability within the financial markets. The combination of durable and transient measures, including OMO purchases, VRR auctions, and forex swaps, has helped ensure that banks continue to function smoothly and that credit growth remains supported in these uncertain times.

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