India’s central bank is walking a fine line between currency stability and domestic liquidity.
As the Reserve Bank of India (RBI) aggressively sells dollars to defend the rupee — now hovering near record lows of ₹88.80 — it’s also draining liquidity from the banking system.
Traders estimate RBI’s FX defense has pulled ₹1.5–2 trillion from the system this month alone.
💰 Liquidity Strain, Policy Options
Citi estimates that durable liquidity has already dropped from ₹5.2T in September to ₹3.6T by mid-October — and could fall further.
That’s pushed short-term yields higher, even after multiple rate cuts.
Economists now expect the RBI to launch bond purchases (OMO) worth ₹1–1.5 trillion ($11–17B) to ease the squeeze.
“We anticipate an OMO announcement once yields rise further or at the December MPC meeting,”
said Citi’s Samiran Chakraborty.
📉 Market Impact
Yields fell slightly this week as speculation grew over potential RBI intervention through OMOs.
IDFC First Bank expects up to ₹2T in bond buys over the next five months — a move that could
restore liquidity and anchor rates without another policy cut.
“Rate cuts may be done, but liquidity injections are the new policy tool,”
noted Gaura Sen Gupta, Chief Economist at IDFC First Bank.
🔹 The Takeaway
The RBI’s dilemma highlights a broader emerging-market tension:
💱 Defend the currency too hard — and you choke liquidity.
💵 Ease too much — and the currency weakens further.
In this balancing act, OMO bond purchases could become India’s quiet lever for growth stability in 2025.