News Stocks Market Participants Push for OMOs and Currency Swaps as Liquidity Deficit Hits ₹60,000 CroreMarket Participants Push for OMOs and Currency Swaps as Liquidity Deficit Hits ₹60,000 Crore
Market participants are prioritizing liquidity management over rate cuts ahead of RBI's February 4-6 policy meeting, with the banking system facing a ₹60,000 crore deficit as of January 21. Strong consensus has emerged for open market operations and dollar buy-sell swaps to address funding stress, while additional measures like longer-term repos and potential CRR cuts are being considered. The focus on liquidity tools comes as government bond yields continue rising despite previous rate cuts, with combined government borrowing expected to reach ₹30 trillion next year.
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Market participants are strongly advocating for durable liquidity management tools over additional rate cuts as the Reserve Bank of India prepares for its Monetary Policy Committee meeting on February 4-6. The banking system currently faces a significant liquidity deficit, prompting calls for targeted interventions to address funding stress.
Current Liquidity Situation
The banking system's liquidity position has deteriorated significantly, with market participants highlighting the urgent need for intervention. As of January 21, the system was experiencing a substantial deficit that has prompted widespread discussion among economists and treasury officials.
| Parameter | Current Status |
|---|---|
| Liquidity Deficit | ₹60,000 crore |
| Assessment Date | January 21 |
| Policy Meeting | February 4-6 |
| Rate Cut Likelihood | Unlikely |
The liquidity strain stems from multiple factors including persistent RBI intervention in the foreign exchange market to curb excessive rupee volatility, strong credit growth, and advance tax outflows. An economist who attended recent discussions noted that "nobody was asking for a rate cut, and everybody was asking for liquidity only."
Preferred Liquidity Tools
Market participants have reached a strong consensus on the most effective instruments to address the current situation. Open market operations and dollar buy-sell swaps emerged as the favored tools, with participants moving away from reliance on short-term measures like variable-rate repo operations.
Open Market Operations
OMOs received widespread support during discussions, though participants acknowledged certain limitations. While many argued for increased bond purchases to inject rupee liquidity, others cautioned that banks' ability to sell securities faces constraints from liquidity coverage ratio requirements. One participant proposed that RBI consider publishing an indicative OMO calendar, possibly up to ₹5 trillion, for the next financial year to provide market predictability.
Currency Swap Operations
Dollar funding stress has become a significant concern, leading to strong support for buy-sell swaps as an effective and flexible tool. A treasury official explained: "We want more liquidity, and one of the primary tools which got discussed was buy-sell swaps because of dollar funding stress, and I think that's what the market evidently told them."
Several participants suggested that RBI could announce another tranche of long-tenor swaps, potentially ranging from $5-10 billion, to reassure markets ahead of March-end balance sheet tightening.
Additional Measures Under Consideration
Beyond the primary tools, market participants have proposed several supplementary measures to address liquidity concerns:
- Longer-term Variable-Rate Repos: Short-duration VRRs are seen as offering only transient relief
- Targeted Long-Term Repo Operations: TLTROs could provide more sustained liquidity support
- Cash Reserve Ratio Adjustment: A temporary 1% CRR cut was suggested, though some participants noted that with CRR already at 3%, RBI may prefer to preserve this tool for more acute crises
The central bank previously cut CRR by 1% in June 2025, implementing it in four equal tranches through November, which lowered the ratio from 4% to 3% and injected ₹2.50 trillion into the system.
Market Challenges and Outlook
Concerns over the government's borrowing program have added complexity to liquidity management discussions. Combined central and state borrowing for the next year is expected to reach approximately ₹30 trillion, underscoring the need for supportive liquidity management strategies.
The currency situation has also drawn attention, with the rupee hitting a fresh record low of 91.7450 against the dollar on Wednesday. Participants advised RBI to avoid verbal intervention on the rupee, preferring actions over commentary.
Despite the 125 basis points rate cut in 2025, government bond yields have continued rising. Since last month's 25 basis points cut announcement, the yield on the 10-year benchmark government bond has increased 13-15 basis points to 6.63%, highlighting the limited transmission of monetary policy easing.
MUFG Bank noted in a January 16 analysis: "From a rates perspective, we continue to think RBI is at the end of the rate-cutting cycle, and we forecast an extended hold in the repo rate at 5.25%. Capital outflows, FX intervention to cap INR weakness, coupled with elevated state government borrowing, are hindering transmission of RBI's rate cuts to the broader interest rate structure."
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