The Reserve Bank of India has intervened with a new liquidity injection as the rupee hit a historic low last week. The latest measures include a 25 basis point rate cut, Rs 1 lakh crore of open market purchases in December, and a USD 5 billion buy-sell swap.
The purpose of these actions is to stabilize market sentiment and reduce volatility. However, questions have been raised about whether liquidity support can effectively calm the currency’s fluctuations.
The substantial open market purchases aim to infuse cash into the banking system. When the RBI buys government bonds, it injects money directly into the system, easing money market rates and alleviating liquidity constraints.
The Rs 1 lakh crore open market operation signals that funding markets will continue to operate smoothly, reassuring investors and reducing pressure on the rupee. Additionally, the USD 5 billion swap injects rupees into the system without depleting reserves, providing immediate liquidity and instilling confidence in market stability.
Experts like Jyoti Prakash Gadia and Ranen Banerjee view these measures positively, noting that they will support GDP growth targets and address rupee volatility effectively.
While the liquidity support may not directly strengthen the rupee, it can prevent a disorderly decline by maintaining stable funding conditions and growth prospects. The combination of rate cuts, swaps, and open market operations enhances liquidity support across various market channels, calming uncertainties.
Despite these efforts, external factors such as US rate changes, capital flows, and geopolitical tensions will continue to impact the rupee’s trajectory. Nevertheless, with low inflation providing room for rate cuts and supportive borrowing conditions, the RBI aims to stabilize the economy while addressing currency fluctuations.
The current liquidity injection targets stability and market sentiment, with the rupee’s recovery dependent on future global developments.