India's central bank to inject over $23 billion of liquidity into banking system

By Admin

24 Jan, 2026

Introduction
India’s central bank has announced a major liquidity infusion aimed at stabilizing financial markets, easing borrowing conditions, and managing currency pressures. Through a mix of bond purchases, foreign exchange swaps, and repo operations, the move signals a proactive stance to support the banking system amid rising bond yields and a weakening rupee.

Overview of the Liquidity Injection
According to a report by Reuters, the Reserve Bank of India (RBI) unveiled measures to inject more than $23 billion into the banking system. This liquidity will be provided through government bond purchases, buy/sell foreign exchange swaps, and repo operations.
Under Governor Sanjay Malhotra, the RBI has accelerated liquidity support over the past year to reinforce interest rate cuts and offset the impact of its market interventions to defend the rupee.

Key Measures Announced by the RBI
The central bank will conduct a 90-day variable rate repo (VRR) operation worth 250 billion rupees ($2.7 billion) on January 30. This marks the RBI’s first-ever 90-day VRR cash infusion, aimed at ensuring adequate short-term liquidity.
Following this, the RBI will hold a three-year $10 billion USD/INR buy/sell swap auction on February 4, providing longer-term dollar liquidity to the system.
In addition, the RBI will purchase 1 trillion rupees worth of government bonds in two tranches, scheduled for February 5 and February 12.

Record Bond Purchases
The RBI has already bought 3 trillion rupees of government bonds during December and January. This has pushed the total bond purchases for the current fiscal year to a record high of 5.7 trillion rupees. These purchases are intended to soften bond yields, which have risen sharply due to heavy government borrowing.

Managing the Monetary Trilemma
India is currently facing a classic monetary trilemma: supporting the currency, keeping borrowing costs anchored, and allowing free movement of capital. Rising bond yields and simultaneous pressure on the rupee have complicated policy choices for the central bank.
Economists note that these liquidity measures are designed to balance these competing objectives while maintaining financial stability.

Expert Views on Liquidity Impact
Gaura Sen Gupta, Chief Economist at IDFC First Bank, stated that the durable liquidity measures are expected to raise system liquidity to the RBI’s target range of 0.6% to 1% of net demand and time liabilities. She also noted that the VRR is a temporary tool to keep overnight rates under control.
She further expects another 1 trillion rupees of bond purchases in March, which could lift banking system liquidity to around 0.9% of net deposits.

Market Reaction and Outlook
In recent weeks, steep government borrowing has pushed Indian bond yields higher, while the rupee slipped to a record low of 91.9650 against the US dollar. The currency has been under pressure due to foreign portfolio outflows and weakness in equity markets.
Market participants believe the RBI’s announcement was timely and largely in line with expectations. A trader at a state-run bank remarked that the measures should help reverse some of the upward pressure on bond yields.

Conclusion
The RBI’s decision to inject over $23 billion into the banking system highlights its commitment to maintaining liquidity, stabilizing markets, and supporting economic growth. As bond yields and currency movements remain volatile, these measures are expected to play a crucial role in restoring confidence and ensuring smoother transmission of monetary policy in the months ahead.