The Reserve Bank of India (RBI) will inject approximately ₹1.45 trillion into the banking system, Governor Sanjay Malhotra announced on Friday while outlining the policy rate decisions.
The liquidity infusion will comprise ₹1 trillion through open market operations (OMOs) and ₹45,000 crore ($5 billion) via a three-year US dollar-rupee swap.
Under OMOs, the central bank buys government bonds from banks, injecting money directly into the system. In the case of forex swaps, the RBI purchases dollars from banks against rupees held by them, thereby adding liquidity. The dollars are sold back after a set period—in this instance, three years.
As of 4 December, the banking system had a liquidity surplus of ₹2.7 trillion, up from ₹2.6 trillion the previous day. Market analysts noted that the RBI had indicated in April that liquidity at 1% of net demand and time liabilities (NDTL) or deposits is sufficient for effective transmission of past rate cuts. However, in recent months, banking system liquidity has fallen below 1% of NDTL.
Front-Loading Policy
“By announcing a 25-basis-point rate cut while maintaining a neutral stance, along with ₹1 trillion in OMOs, the RBI is once again front-loading its rate cut,” said Anitha Rangan, Chief Economist at RBL Bank.
Rangan added that the OMO announcement indicates the central bank’s awareness of government securities (G-sec) yields. Meanwhile, the three-year forex swap suggests RBI is mindful of foreign exchange risks. The central bank has implemented such swaps previously and may provide further support if needed.
Despite the rate cut and liquidity measures, the market interpreted this as a dovish policy stance.
Churchil Bhatt, Executive Vice-President of Investments at Kotak Mahindra Life Insurance Company, noted that while the RBI unanimously cut the repo rate by 25 basis points and maintained a neutral stance, it signaled a dovish bias due to growth-related uncertainties.
“Together, these measures are growth-supportive, and the evolving growth-inflation mix keeps the door open for one more rate cut. Financial conditions should, therefore, support rate transmission and bolster bond market sentiment,” Bhatt said.
The strong GDP print in the September quarter had earlier cast doubts on the possibility of a December rate cut.
Governor Malhotra stated that, while growth remains resilient, it is expected to moderate slightly. The six-member Monetary Policy Committee (MPC) raised its GDP forecast to 7.3% from 6.8% previously.
“…the growth-inflation balance, especially the benign inflation outlook on both headline and core measures, continues to provide the policy space to support growth momentum,” he said.
The MPC reduced its CPI inflation projection for 2025-26 to 2%, down from 2.6%, while raising its GDP forecast to 7.3% from 6.8%.
Madhavi Arora, Chief Economist at Emkay Global Financial, described the primary liquidity infusion of around ₹1.45 trillion as constructive but “modestly below” expectations of ₹2 trillion for the remainder of FY26.
“We reiterate that the rupee’s softness should not be interpreted as a deterrent to future rate easing but as a natural growth stabilizer,” she said.
Positive for NBFCs
Non-bank financiers expect improved financial conditions following the RBI’s liquidity measures. Shilpa Bhatter, CFO of UGRO Capital, said that OMOs and the dollar-rupee swap will ease funding conditions, benefiting non-banking financial companies (NBFCs) and enhancing credit flow to small businesses.
The RBI has been encouraging NBFCs to diversify funding sources beyond banks. According to RBI data, NBFC borrowings from banks declined from 43.1% of total funding at end-March 2023 to 42.7% a year later.
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