The Reserve Bank of India on Wednesday announced measures to ease liquidity in the banking system, including purchase of government bonds under open market operations (OMO) and foreign currency swaps.

Under the OMO auctions, RBI will purchase government securities (G-Secs) worth Rs 1 lakh crore in two tranches of Rs 50,000 crore each, to be held on 12 March and 18 March.

The central bank will also conduct a buy/sell USD/INR currency swap auction of $10 billion for a tenor of 36 months on 24 March.

Banks are facing deficit liquidity and the repo cut of 25 basis points by the RBI on 7 February has hardly helped, with minimal transmission having taken place. The banking system will also see outflows from mid-March due to the advance tax and goods and service tax payments, resulting in liquidity tightness of about Rs 2.50 lakh crore.

While system liquidity was at a surplus of Rs 1.35 lakh crore in November 2024, it moved to a deficit of Rs 65,000 crore in December and widened to Rs 2.1 lakh crore in January 2025. In February, this eased slightly to around Rs 1.6 lakh crore. 

According to a research report by the State Bank of India, the tightness was due to reasons such as tax outflows, forex market intervention and volatility in capital flows. The implementation of Just in Time (JIT) has also impacted system liquidity through movements in government cash balances. 

‘Just-in-time liquidity’ refers to a system wherein the Union government releases funds to states and implementing agencies only when needed, rather than in advance, to minimise the amount of idle cash in bank accounts and optimise government funds' use.

“In principle, the unspent cash balance of the government is now being auctioned by the RBI through repos, and has its limitation in terms of amount and tenor. While RBI’s steps do provide some comfort in terms of liquidity, the cash balances of government cannot become a part of permanent liquidity as they cannot be transferred to banking system under the current JIT mechanism and can, at best, be used to manage only short term mismatches,” the SBI report, titled ‘Systemic Liquidity needs Flexible Targeting of Permanent Nature’, said.

The report projected the gap in open market operations at Rs 1.7 lakh crore for FY26. It suggested that RBI could use the cash reserve ratio (CRR) more as a regulatory intervention tool / counter-cyclical liquidity buffer rather than as a liquidity tool in the future.

CRR is a certain percentage of the total deposits banks need to keep with the RBI as cash. Currently, the RBI has fixed the ratio at 4%.

The RBI infused at least Rs 3.2 lakh crore into the system since late January. The liquidity measures announced by the central bank included OMO purchases of government securities worth Rs 60,000 crore in three tranches of Rs 20,000 crore each; a $5 billion swap; a 56-day variable rate repo (VRR) auction for Rs 50,000 crore; and a three-year buy/sell dollar/rupee swap auction on 21 February worth $10 billion to meet the “durable liquidity needs of the system”.

RBI said it will “continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions”.