Context: 

The Reserve Bank of India (RBI) has announced to infuse ₹1.9 lakh crore into the banking system through open market operations (OMO) and foreign currency swaps to ease the tight liquidity conditions in the banking system.

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• Under the OMO auctions, the RBI will purchase government securities worth ₹1 trillion (1 lakh crore) in two tranches of ₹50,000 crore each.
• Additionally, the RBI will also conduct a buy/sell USD/INR currency swap auction for $10 billion (0.9 lakh crore) with a 36-month tenor.
• Earlier, the RBI had successfully conducted a $10 billion US dollar-rupee swap in February which saw strong demand. 
• The RBI’s decision follows its earlier measures to ease the liquidity situation through 25 basis point rate cut in February and postponement of the implementation of new Liquidity Coverage Ratio (LCR) norms by a year to March 31, 2026. 

Current Liquidity Deficit and its Causes

There has been a persistent liquidity deficit in the banking system, with the deficit widening from ₹1.35 trillion in November 2024 to ₹2.1 trillion in January 2025.

Various RBI’s actions have injected approximately ₹3.2 trillion into the banking system, but liquidity conditions remained tight, and experts suggest that further interventions are needed. 

Factors contributing to the liquidity crunch include tax outflows and dollar sales in the forex market to stabilize the rupee.

The implementation of the "Just-in-Time" (JIT) liquidity mechanism, which limits the amount of idle government funds in the banking system, has also added to the liquidity tightness.

• Under the JIT mechanism, unspent cash balances of the government are auctioned by the RBI through repos (Repo is a specific type of OMO that involves buying and selling government securities).
• These balances cannot be used to permanently ease liquidity as they cannot be transferred to the banking system under the current JIT system.

Recommendations by SBI Research

• A research report by the State Bank of India (SBI) highlighted the need to revisit the RBI’s liquidity management framework.
• The report suggested replacing the Weighted Average Call Rate (WACR) with a more effective policy rate as WACR does not serve its intended purpose.
• SBI recommended that RBI should use the Cash Reserve Ratio (CRR) as a countercyclical liquidity buffer instead of solely as a liquidity management tool.