Aimed at supporting credit growth and speedy transmission of policy rate cuts, the Reserve Bank of India (RBI) has announced measures to inject up to $16 billion of liquidity into the banking system this month via debt purchases and a foreign exchange swap.

The RBI will conduct open-market purchases of bonds worth up to Rs 1 lakh crore ($11.1 billion) and a $5 billion dollar-rupee buy-sell swap.

The debt purchases will be conducted in equal tranches on December 11 and December 18. The three-year forex swap will be undertaken on December 16.

"... In view of the evolving liquidity conditions and the outlook, the Reserve Bank has decided to conduct OMO purchases of government securities of Rs 1,00,000 crore and a 3-year USD/INR Buy Sell swap of USD 5 billion this month to inject durable liquidity into the system,” RBI Governor Sanjay Malhotra said while announcing a repo cut by 25 basis points in the bi-monthly monetary policy.

Earlier, the RBI had bought bonds worth Rs 4.84 lakh crore between January and May. The open-market operations (OMO), under which the RBI buys government bonds from banks, have not been conducted since May.

The central bank had also conducted foreign exchange swaps worth $10 billion each in February and March. Under this, the RBI purchases dollars from banks against rupees held by them. This infuses rupee liquidity into the banking system. Since these are three-year forex swaps, the RBI will sell back the dollars at the end of the specified period.

“The primary instrument of monetary policy is the policy repo rate. It is expected that changes in the short-term interest rates will transmit to various long-term rates. At the same time, the primary purpose of open market operations is provide durable liquidity and not to directly influence G-sec yields," Malhotra said.