RBI interventions:

1. Conducted primarily through Liquidity Adjustment Facility (LAF) using market-based tools.
2. Aim to balance liquidity across banks/sectors and keep call rates aligned with repo rate.

Role of liquidity in the economy:

1. Money markets manage cash liquidity, enabling payments, settlements, and short-term borrowing.
2. Essential for smooth functioning of both money markets and capital markets (price discovery, efficient trading of stocks/bonds).

Insufficient liquidity leads to:

1. Savers hoarding cash instead of transacting/consuming.
2. Banks restricting credit.

Broader impact

1. Supports sustained lower interest rates, higher GDP growth, and lower inflation in the current disinflationary, pro-growth environment
2. Liquidity management is separate from direct rupee depreciation measures but indirectly helps stabilize the currency and economy

Money markets are about liquidity of cash in the system. The level of liquidity facilitates and influences the payments and settlements for transactions in the economy. Liquidity enables short term borrowings in the money markets. Liquidity in the monetary system is key even for the capital markets. Supply and demand in the capital markets for price discovery and efficient trading of stocks and bonds needs liquidity in the money markets.

In the absence of sufficient liquidity in the market, savers prefer to hold hard cash or savings rather than use money for transactions or consumption. On the other side, lack of sufficient funds constrains the banks in dispensing even regular credit volumes. Also, the capex investments slow down or get deferred. These may cause recession and higher gross non performing assets (NPAs).

Currency in circulation, government balances, and external flows constitute gross liquidity. While gross liquidity will always be positive, the availability of funds may not be balanced across the banks and sectors for all purposes. Therefore, continuous interventions by Reserve Bank of India (RBI) are essential to influence net liquidity position. The liquidity position after RBI interventions is net liquidity. Net liquidity influences credit availability in the market and interest rates. Interventions by RBI are usually done under Liquidity Adjustment Facility (LAF) which allows RBI to use market based tools for short term control.  

Net positive liquidity increases credit availability in the market and reduces borrowing costs. It helps the monetary transmission quickly and aligns call market rates with repo rate. Net positive liquidity is key for GDP (Gross Domestic Product) growth. However, excess liquidity may cause inflation and currency depreciation. The negative liquidity does the opposite. It squeezes credit availability in the market and increases borrowing costs. It also increases the market volatility.

The criticality of liquidity can be discerned only when it is in high surplus or deficit. For instance, in January 2025, liquidity crunch peaked to a 15-year high deficit of Rs. 3.2 trillion. That deficit saw credit-deposit (CD) ratio cross 80% while median CD ratio over 60 years has been 67%. It caused decline in capital markets theme index by 15% and SME by 10% which are credit sensitive. The timely and sequential interventions of RBI reversed the deficit from Rs. 3.2 trillion to a surplus of Rs. 0.70 trillion.

It is RBI’s interventions which influence the net liquidity to be either positive or negative. The current position in the market is unusually volatile with multiple shifts between positive and negative liquidity positions. Creating positive net liquidity is a regular exercise for RBI. However, differentiating the need between short term or long term is critical. Liquidity position caused by advance tax payment season, GST payment dates, and festivals usually reverse over a short period. 

If liquidity gaps are due to lower government spending, increased currency in circulation, foreign exchange fluctuations, etc., market needs long-term durable liquidity support.

In such instances, normal interventions using short term tools such as repo operations, variable rate repos (VRRs), variable rate reverse repos (VRRR), and marginal standing facility (MSF) which address only transient deficits are not sufficient. Interventions such as open market purchases of G-secs, long-term VRRs, USD-Rupee sell swaps for multi-year periods, etc are required to provide durable longer term positive liquidity. 

Along with the successful implementation of 100 basis points reduction in cash reserve ratio (CRR), RBI realized the need for more measures. Resultantly, in its monetary policy committee (MPC) meeting on 5th December 2025, RBI announced further open market purchases of Rs. 1 trillion and a $5 billion (Rs. 4,50,000 crs) USD-INR 5-years sell swap. These two measures create long-term durable liquidity in the market.

The current disinflation, higher growth rate, and lower interest rate regimes are dynamic and may fluctuate as per the evolving internal and external situations. If and what measures are required to address rupee’s depreciation are distinct from the liquidity issue. But, the measures of RBI targeting long-term durable liquidity will help the economy in sustaining lower interest rates, higher GDP growth, and lower inflation rates. RBI and its team deserve appreciation for their agility and responsiveness.

Opinions about RBI’s Monetary Policy Committee(MPC) meet:

Speaking immediately after the policy announcement, A senior official of a PSU bank described the rate cut as “largely expected within the house” but acknowledged short-term pressure on net interest margins. He stated that loan reprising happens instantly through the External Bench Mark Lending mechanism,(method where the interest rates link directly to the external benchmarks, like the repo rate determined by RBI) while fixed deposit rates adjust only on maturity.

The process was anyway nearing completion in the next couple of months; this additional cut merely pushes it back slightly, he said, adding that SBI expects to recover to “even keel” by March 2026. On the lending side however, he was was upbeat. He opined that retail and housing loan demand is already witnessing “very strong” growth, and the 25 bps cut acts as an additional trigger. Corporate demand, however, is unlikely to move materially on small rate changes. A top executive of a construction firm called the policy “very bold and audacious” given the backdrop of an 8%+ GDP growth rate, the rupee being among the worst-performing Asian currencies (down by nearly 6%), and the currency briefly touching 90+ levels. He admitted that in such circumstances, mot many would expect a central bank to cut rates in this environment — most would expect a hike.

Dr. Kishore Nuthalapati CFO, BEKEM Infra Projects Pvt Ltd