RBI Injects Record Funds to Ease Liquidity Crunch Amid Forex Intervention
The Reserve Bank of India (RBI) injected ₹2.50 trillion ($28.85 billion) into the banking system through an overnight variable rate repo auction on Wednesday, marking its largest single-day infusion in over a year. Banks subscribed to ₹1.94 trillion of the offered funds. The move comes after the central bank’s aggressive foreign exchange (FX) market intervention over the last two sessions, where it reportedly sold $4 billion to $7 billion to stabilize the rupee.
The RBI’s heavy dollar sales have significantly squeezed rupee liquidity, pushing the banking system’s liquidity deficit to ₹2 trillion as of February 11. Market experts warn that this liquidity crunch could undermine the effectiveness of last week’s rate cut, as banks may struggle to pass on the lower rates to consumers. To address the situation, the central bank also doubled its planned government securities purchases to ₹400 billion.
Economists suggest that while the RBI aims to provide liquidity support and ensure smooth rate cut transmission, its ongoing FX interventions could counteract those efforts. “The RBI will want to sterilize any large FX interventions that drain out domestic liquidity to keep conditions neutral in line with the monetary policy stance,” said Dhiraj Nim of ANZ Research. The RBI has infused over ₹1.5 trillion into the banking system in the past month to ease liquidity pressures.
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