In News:

In January 2025, the Reserve Bank of India (RBI) announced its largest monetary easing since the COVID-19 pandemic, unveiling a multi-pronged plan to inject over ?1.5 lakh crore into the money markets.

This move aims to address liquidity shortfalls caused by RBI’s forex interventions and signal possible easing in the upcoming monetary policy review.

Context: Why Liquidity Infusion Was Needed

• Forex Intervention: RBI sold over $50 billion from its foreign exchange reserves to stabilise the rupee, in response to large-scale equity sell-offs by Foreign Institutional Investors (FIIs).
• Impact: These interventions reduced rupee liquidity, tightened short-term interest rates, and raised borrowing costs.
• Liquidity Deficit: Market estimates pegged the shortfall at ?3 lakh crore.

Key Liquidity Measures Announced by RBI

• Government Bond Buy-Back: ?60,000 Crore
  • Conducted in three tranches on January 30, February 13, and February 20, 2025.
  • Objective: To inject liquidity into the banking system by repurchasing government securities before maturity.
• 56-Day Variable Rate Repo Auction: ?50,000 Crore
  • Scheduled for February 7, 2025.
  • Enables banks to borrow short-term funds by offering government securities as collateral at a market-determined interest rate.
• USD/INR Buy-Sell Swap Auction: $5 Billion
  • A six-month forex swap in which RBI borrows dollars in exchange for rupees and agrees to buy them back later.
  • Helps stabilize the rupee without draining rupee liquidity.

Significance of the Measures

• Monetary Transmission: With adequate liquidity, any potential repo rate cut will be more effectively transmitted through lower lending rates, boosting investment and consumption.
• Financial Stability: By calming money markets and moderating borrowing costs, RBI strengthens confidence amid global uncertainties.
• Rupee Management without Liquidity Squeeze: The forex swap allows rupee liquidity to remain intact while addressing exchange rate volatility.

Governor’s Focus Areas:

In a meeting with private sector bank heads ahead of the February monetary policy review, RBI Governor Sanjay Malhotra highlighted the following priorities:

• Financial Stability & Inclusion
• Enhanced Digital Literacy and Credit Access
• Improved Customer Service & Grievance Redressal
• Cybersecurity & IT Risk Management
• Monitoring of Third-party Service Providers
• Countering Rising Digital Fraud