Reserve Bank of India (RBI) is set to infuse nearly Rs 1.5 lakh crore into the banking system during December in a major liquidity-boosting move. This comes as lenders face tightening liquidity, higher currency leakage during the festive season, and increased government spending pressures.
The liquidity injection aims to stabilise short-term interest rates, support loan growth, and ensure smooth financial system functioning during a period of high demand.
Why RBI Is Injecting Liquidity
1. Liquidity Has Been Tight for Months
The banking system has been experiencing a liquidity deficit driven by:
- Strong credit growth
- Higher cash withdrawals
- Advance tax outflows
- Limited government spending earlier in the quarter
2. To Stabilise Overnight Rates
Short-term borrowing costs such as the call money rate have risen above the RBI’s repo rate. Infusing liquidity helps bring rates back within the policy corridor.
3. Support for Banks During Peak Spending Season
December typically sees:
- Higher consumer spending
- Corporate payouts
- Greater transaction volumes
RBI’s liquidity boost ensures banks meet these financial demands smoothly.
How the Liquidity Infusion Works
RBI plans to inject funds using tools such as:
- Variable Rate Repo (VRR) auctions
- Short-term liquidity operations
- Open market operations (if needed)
The central bank may conduct multiple repo auctions through December to maintain system liquidity above deficit levels.
Impact on Banks, Borrowers & Markets
🏦 1. Improved Banking Liquidity
Banks will have more funds available for:
- Corporate loans
- Retail credit
- MSME financing
This supports credit expansion at year-end.
📉 2. Lower Overnight & Short-Term Rates
Rates in the money market may ease as liquidity conditions normalise.
🧾 3. Limited Impact on EMIs
This liquidity action does not change policy rates, so home loan or car loan EMIs remain the same.
📈 4. Stock Market Sentiment May Improve
Liquidity boosts generally:
- Support banking stocks
- Encourage FPI inflows
- Reduce volatility
💰 5. Government Borrowing Becomes Smoother
With higher liquidity, banks can more easily absorb government bond supply.
What It Means for the Economy
Boost to Year-End Growth
Extra liquidity helps businesses meet working-capital needs, supporting overall economic activity.
Controlled Approach
RBI has emphasised that liquidity support will be temporary and calibrated, ensuring inflation concerns remain under control.
Supports Financial Stability
A well-functioning banking system is essential for:
- Payment flows
- Credit distribution
- Market stability
The December infusion aligns with RBI’s commitment to maintaining stability amid global uncertainty.
