Mint Explainer: Understanding how RBI's measures will boost liquidity by ₹1.5 trillion, lead to rate cut

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Subscribe to enjoy similar stories. The Reserve Bank of India (RBI) announced a set of forex, money market and interest rate measures that will collectively infuse ₹1.5 trillion over time, amid a clamour for liquidity from bankers and money market participants.Mint explains the significance of these measures. The RBI announced three measures to boost liquidity in the system.

Firstly, the central bank will purchase government securities (G-Secs) worth ₹60,000 crore through open market operations (OMOs) in three tranches of ₹20,000 crore each. Through this, the RBI will buy G-Secs from the open market and inject liquidity into the system. The OMO auctions will take place on 30 January, and 13 and 20 February.

It will also conduct a 56-day variable rate repo (VRR) auction of ₹50,000 crore on 7 February and a dollar-rupee sell swap auction of $5 billion for a tenor of six months on 31 January. Under the swap, the RBI will buy dollars from banks in exchange for rupees, which will be released into the system. After six months, the RBI will sell the dollars.

These measures are expected to cumulatively infuse liquidity worth ₹1.5 trillion into the system over a period of time. They will provide the much-needed durable liquidity that has been the biggest ask of bankers. However, it may not be enough to plug the liquidity gap of ₹3 trillion in the system.

While the RBI carried out secondary market OMOs last week, having a scheduled OMO calendar provides certainty to the market. The VRR auction aims to ensure sufficient liquidity to meet banks' needs till 31 March. The dollar-rupee swap could help to smoothen the impact of an upcoming near-maturing massive, short position of the RBI in the forward and spot FX market, economists