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Informist, Friday, May 29, 2026

NEW DELHI – The Reserve Bank of India's liquidity management operations will remain in sync with the monetary policy stance, the central bank said in its Annual Report for 2025-26 (Apr-Mar). The RBI's Monetary Policy Committee has maintained a 'neutral' policy stance since June while cutting its repo rate by 125 basis points between February and December 2025 to 5.25%.

The MPC softened its policy stance to 'accommodative' in April before reverting to 'neutral' at the next policy meeting. The average daily liquidity surplus was INR 1.86 trillion in FY26, the report said. After the last rate cut, the weighted average call rate was 5.29% in the March quarter. The operating target of monetary policy was 5.36% in Oct-Dec and 6.32% in Jan-Mar 2025.

The Financial Markets Operations Department's agenda in FY27 includes the effective conduct of liquidity management operations for monetary policy transmission, the report said. The RBI infused durable liquidity worth INR 13.78 trillion in FY26 in consonance with the rate cuts. The measures in the financial year ended March led to better policy transmission, the RBI said, with the weighted average lending rate on outstanding bank loans falling by 88 bps. However, the lending rates of non-banking finance companies fell by only 16 bps during the period.

The department will also "conduct policy-oriented research and analysis on financial markets to guide market operations strategies on an ongoing basis," the report said. Activity in the foreign exchange market will be principle-based and aimed at curbing excessive volatility in the dollar-rupee exchange rate.

The RBI's monetary policy actions in FY26 remained supportive of growth as low inflation provided room to cut the repo rate and inject liquidity, while keeping its 4% CPI inflation target in mind, the report said. Retail inflation averaged 2.1% in FY26. A sizeable liquidity drain from an increase in currency in circulation required the central bank to add durable liquidity to the banking system, the report said.

Currency in circulation drained liquidity worth INR 4.43 trillion in FY26, up from INR 2.13 trillion the previous year. The RBI's sales of foreign exchange reserves also drained INR 4.69 trillion of durable liquidity from the banking system, up 61% on year.

Meanwhile, the government built up INR 1.67 trillion of cash balances in FY26, including INR 1.03 trillion in the final quarter alone. This reduced the liquidity available to banks, while in FY25 the government drew down cash balances worth INR 937 billion, thereby infusing liquidity. Despite this, the daily net absorption at the end of March was INR 2.58 trillion, up from INR 1.30 trillion a year ago, the RBI said. The daily liquidity adjustment facility position was a surplus of INR 1.66 trillion in the March quarter, against a deficit of INR 1.15 trillion a year ago.

The central bank bought a record INR 8.78 trillion of government bonds in FY26 through open market operations, up from INR 2.59 trillion the previous year. The change in required reserves, helped by a phased cut in cash reserve ratio to 3% of banks' net demand and time liabilities from 4% earlier, added INR 1.54 trillion of liquidity to the banking system in FY26, up nearly eightfold on year.

However, term repo auctions totalled INR 1.62 trillion in FY26, down from INR 1.83 trillion in FY25. The bid-cover ratio for variable-rate repo auctions in FY26 was 0.41% across 57 overnight operations, peaking at 0.86% for 4-6-day operations. The offer-cover ratio for variable-rate reverse repo auctions ranged from 0.74% to 0.96%, though there were no operations for over 8 days and only 30 VRRR auctions throughout the year.

Tighter liquidity conditions in the March quarter led to firmer demand for short-term liquidity injections, the RBI said. Credit spreads also rose, with the spread of commercial paper over Treasury bills jumping to 227 bps on average in the March quarter from 134 bps a year prior. Even for dated securities, the spread of the five-year AAA corporate bond yield over the government bond of similar maturity widened to 107 bps in Jan-Mar from 76 bps the previous quarter and 87 bps in the year-ago period. 

In the collateralised market, the tri-party repo rate averaged 5.09% in the March quarter, down 10 bps from the December quarter. The average yield on the three-month Treasury bill rose 4 bps sequentially to 5.33%. Meanwhile, the five-year AAA corporate bond yield averaged 7.53%, up 47 bps on quarter, while the 10-year benchmark government bond yield averaged 6.76% in the March quarter, up from 6.57% in Oct-Dec.  End

Reported by Aaryan Khanna

Edited by Avishek Dutta and Saji George Titus

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