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Informist, Thursday, May 29, 2025

MUMBAI – The Reserve Bank of India will revisit the optimal level of systemic liquidity required for the effective transmission of monetary policy as part of its agenda for 2025-26 (Apr-Mar), the central bank said in its annual report on Thursday.

"The Reserve Bank will undertake liquidity management operations in sync with the monetary policy stance and keep system liquidity adequate to meet the needs of the productive sectors of the economy," the report said. The regulator will continue to review the monetary policy framework in FY26, it said. The Reserve Bank of India will also work towards analysing and refining the framework for forecasting liquidity conditions in FY26, the central bank said. 

The central bank expects domestic activity to strengthen further going ahead in the backdrop of liquidity easing measures undertaken by the bank in FY25. The RBI, in order to ease stress in the banking system and alleviate concern around the liquidity being in deficit, resorted to a host of measures in the previous financial year. 

Last year, system liquidity moved from surplus in Jul–Nov to deficit in Dec-Feb, before turning into surplus by end-March. The RBI reduced the cash reserve ratio of banks by 50 bps to 4.00% of Net Demand and Time Liabilities in December. This reduction in the reserve ratio led to an infusion of INR 1.16 trillion into the banking system, providing some relief, the RBI said.  

In addition, the Reserve Bank undertook a slew of liquidity measures in Jan-Mar including term repo auctions, open market purchase operations and dollar/rupee buy/sell swaps to inject durable liquidity into the banking system. "The leakage in banking system liquidity due to increase in currency demand and the Reserve Bank's forex market operations was partly offset by the drawdown of excess reserves, reduction in GoI (government of India) cash balances and OMO (open market operations) purchases during 2024-25," the RBI said. 

To further ease the liquidity stress and the resultant pressure on the weighted average call rate, the central bank started conducting daily variable repo rate auctions from Jan. 16, with reversal taking place on the next day.

The regulator will continue with liquidity operations in tune with the stance of the monetary policy, it said. During FY25, two-way tuning measures were the key in managning liquidity, the RBI said. The central bank will continue to manage lqiuidity to support the productive needs of the economy, it said.  

Yields on three-month commercial papers of non-bank finance companies and certificates of deposit softened from March 2024, taking cues from the transition of systemic liquidity to surplus and moderation in the wedge between deposit and credit growth, the RBI said. The RBI also found in a study that the automated sweep-in and sweep-out facility have been associated with lower volatility in daily reserve maintenance and a decline in average daily excess reserves by scheduled commercial banks.  End

Reported by Kabir Sharma

Edited by Akul Nishant Akhoury

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