RBI’s ₹1 Lakh Crore OMO and $10 Billion Forex Swap: A Move to Address Liquidity Challenges

The Reserve Bank of India (RBI) has announced liquidity-enhancing measures, including open market operations (OMOs) worth ₹1 lakh crore and a USD/INR buy/sell swap auction of $10 billion. These initiatives aim to stabilise liquidity in the banking system amid fiscal year-end pressures and increasing credit demand.

Breakdown of the OMO and Forex Swap Measures

To address the liquidity crunch, the RBI has scheduled 2 tranches of OMO purchase auctions, each worth ₹50,000 crore, on March 12 and March 18. Additionally, a $10 billion USD/INR buy/sell swap auction for a 36-month tenor will be conducted on March 24.

The RBI reiterated its commitment to closely monitoring liquidity and market conditions, adjusting its approach as necessary to ensure financial stability.

Why Is Liquidity Under Pressure?

The liquidity deficit in the banking system has significantly fluctuated in recent months:

• December 2024: ₹65,000 crore deficit
• January 2025: Widened to ₹2.07 lakh crore
• February 2025: Improved slightly to ₹1.59 lakh crore

Despite this marginal recovery, liquidity remains constrained due to year-end tax outflows and a rise in credit demand. The RBI has been deploying multiple tools since January 16 to manage liquidity, including:

• Variable Rate Repo (VRR) auctions
• Open market operations (OMOs)
• A 25 basis points repo rate cut

The $10 billion forex swap auction—the largest ever conducted by the RBI—has also played a role in infusing durable liquidity into the system.

Impact on Bond Markets and Interest Rate Spreads

While these measures aim to ease liquidity, bond markets remain stressed, with corporate bond yields and certificate of deposit (CD) rates staying elevated.

• The spread between the repo rate and corporate bond yields has widened to 125 basis points.
• The spread between the repo rate and 3-month CDs has increased to 119 basis points as of February.

Additionally, state government securities (SGS) yields have diverged from central government securities (G-secs), with spreads widening from 30-35 basis points to 45-50 basis points, despite recent rate cuts.

Could OMOs in State Government Securities (SGSs) Be the Next Step?

Market observers suggest that additional OMOs targeting state government securities (SGSs) may be needed to reduce these widening spreads and enhance monetary policy transmission. Addressing this divergence could help improve liquidity conditions further and ensure more uniform financial stability across different segments of the debt market.

Conclusion: A Watchful Approach Amid Evolving Conditions

The RBI’s recent actions underscore its proactive stance in managing liquidity and stabilising financial markets. As tax outflows and credit demand continue to exert pressure, market participants will be closely watching how these measures impact liquidity conditions, interest rate spreads, and overall market stability in the coming months.

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