The Reserve Bank of India (RBI) announced measures on December 2025, to inject a total of ₹2.90 lakh crore into the banking system through government bond purchases and a dollar-rupee swap auction. This move is aimed at easing tight liquidity conditions, supporting banks, and managing foreign exchange market volatility.
Key Details and Mechanisms
- Total Injection Amount: The planned total liquidity injection is ₹2.90 lakh crore.
- Instruments Used: The RBI will use two main instruments:
- Open Market Operation (OMO) Purchases: The RBI will purchase Government of India securities worth ₹2,00,000 crore in the market. This injects rupee liquidity directly into banks.
- Dollar-Rupee (USD/INR) Buy/Sell Swap Auction: A $10 billion (approx. ₹90,000 crore) swap auction will be conducted to manage both rupee liquidity and excess dollar liquidity in the system.
- Schedule:
- OMO purchases of ₹50,000 crore each are scheduled for December 29, 2025, January 5, 2026, January 12, 2026, and January 22, 2026.
- The Dollar-Rupee swap auction is scheduled for January 13, 2026, with a tenor of 3 years.
- Objectives
- Improve Liquidity: To improve liquidity conditions within the banking system, which had tightened due to factors like advance tax outflows.
- Support Banks: To ensure banks have sufficient funds to meet credit demand from businesses and individuals, thereby spurring credit growth and supporting economic activity.
- Stabilize Markets: To stabilize government bond yields and manage volatility in the foreign exchange market.
- Monetary Transmission: The measures aim to improve the transmission of recent policy rate cuts across the financial system, making borrowing costs lower and more stable.
PRACTICE QUESTIONS
Consider the following statements:
Statement I: The injection of a large amount of liquidity into the banking system by the RBI is expected to lead to a significant increase in short-term interest rates.
Statement II: An increase in the money supply and available funds in the banking system makes it cheaper for banks to borrow from each other, thereby stabilizing or lowering short-term interest rates.
Which of the statements given above are correct?
a) Both Statement I and Statement II are correct and Statement II explains Statement I
b) Both Statement I and Statement II are correct but Statement II does not explain Statement I
c) Statement I is correct but Statement II is not correct
d) Statement I is not correct but Statement II is correct
Answer: d
Explanation: Statement I is Incorrect: When the RBI injects a large amount of liquidity (money) into the banking system, there is a surplus of funds available. According to the laws of supply and demand, when the supply of money increases, the “price” of that money the interest rate tends to decrease, not increase. Therefore, a large injection of liquidity leads to a fall in short-term interest rates. Statement II is correct: This statement accurately describes the mechanism. When banks have excess funds (increased money supply), they have less need to borrow from the interbank market, and those with surpluses are more eager to lend. This competition and abundance make it cheaper for banks to borrow from each other, which lowers or stabilizes short-term interest rates like the Weighted Average Call Rate (WACR).
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