Why is this issue in the news?

  • During the December 2025 monetary policy review, the Reserve Bank of India (RBI) announced measures to inject durable liquidity into the financial system.
  • The RBI will conduct:
    • Open Market Operation (OMO) purchases of government securities worth ₹1 trillion, and
    • A three-year USD–INR buy/sell swap amounting to $5 billion.
  • These steps were announced to support market stability and to strengthen monetary policy transmission.
  • RBI Governor Sanjay Malhotra stated that these actions would ensure adequate and durable liquidity in the banking system.

WHAT IS LIQUIDITY & WHY IS IT IMPORTANT?

  • Liquidity refers to the availability of money in the banking system.
  • When liquidity is adequate:
    • Banks can lend smoothly.
    • Interest rates stay close to the RBI’s policy rate.
    • Monetary policy decisions are transmitted effectively to the economy.
  • When liquidity is tight:
    • Borrowing costs rise.
    • Policy transmission becomes weak.

WHAT IS OMO?

  • Open Market Operations (OMOs) are a major monetary policy tool used by the RBI.
  • Through OMOs, the RBI buys or sells government securities in the open market to manage liquidity.
How OMOs work
  • OMO purchase:
    • RBI buys government securities from banks.
    • RBI pays money to banks.
    • Liquidity increases in the banking system.
  • OMO sale:
    • RBI sells government securities to banks.
    • Banks pay money to RBI.
    • Liquidity decreases in the system.
In December 2025, RBI announced OMO purchases, which means liquidity injection. WHY RBI ANNOUNCED A ₹1 TRILLION OMO PURCHASE? The RBI’s decision is linked to currency pressure and financial market conditions. A. Pressure on the Indian rupee
  • The Indian rupee crossed the psychological 90-mark against the US dollar.
  • Sharp depreciation often signals:
    • Foreign investor outflows, and
    • Higher demand for dollars.
B. Foreign outflows and liquidity drain
  • When foreign investors pull out money:
    • Rupee liquidity reduces.
    • Banking system faces liquidity stress.
OMO purchases replenish liquidity by injecting durable funds into banks. HOW DO OMOs HELP DURING RUPEE DEPRECIATION? Periods of currency stress often lead to:
  • Tight money-market conditions.
  • Higher call money rates and short-term yields.
Role of OMO purchases
  • Increase rupee liquidity in banks.
  • Ease pressure on short-term interest rates.
  • Ensure smoother inter-bank lending.
  • Support stability during volatile market conditions.

HOW DO OMOs HELP MONETARY TRANSMISSION?

  • Monetary transmission means how effectively RBI’s policy decisions reach banks, borrowers, and markets.
  • Uneven liquidity across banks can:
    • Distort interest rates.
    • Reduce the impact of repo rate cuts.
  • Durable liquidity through OMOs:
    • Creates uniform liquidity conditions.
    • Helps banks align lending rates with the policy repo rate (5.25%).
    • Improves the efficiency of RBI’s policy actions.
OMO V/S REPO OPERATIONS RBI Governor Sanjay Malhotra clearly explained the difference between OMOs and repo operations. Open Market Operations (OMOs)
  • Objective: Provide or absorb durable liquidity.
  • Impact: Long-term liquidity management.
Repo operations
  • Objective: Manage short-term or transient liquidity.
  • Impact: Usually overnight or very short period.
Operating target of RBI
  • RBI uses these tools to align the Weighted Average Call Rate (WACR) with the policy repo rate.
  • The repo rate currently stands at 25%.
USE OF MULTIPLE TOOLS TOGETHER RBI stated that it can:
  • Inject durable liquidity through OMO purchases, and
  • Withdraw short-term liquidity simultaneously through Variable Rate Repo (VRR) operations, if required.
This flexible approach allows RBI to fine-tune liquidity conditions without creating instability.

WHAT IS THE BROADER ECONOMIC BACKDROP?

  • RBI Governor highlighted that despite a challenging global environment, India’s economy remains resilient.
  • Global uncertainties include:
    • Slowing global growth.
    • Geopolitical tensions.
    • Financial market volatility.
  • Despite these factors:
    • India is expected to maintain strong growth momentum.
    • A favourable inflation outlook has given RBI the space to remain growth-supportive.

WHY THIS DECISION MATTERS?

  • Supports banking system liquidity.
  • Prevents excessive tightening in money markets.
  • Strengthens monetary policy transmission.
  • Helps manage volatility caused by rupee depreciation.
  • Reinforces market confidence during uncertain global conditions.