RBI MPC | Is RBI preempting liquidity tightening in later part of December?

Reserve Bank of India

Balancing a constrained policy space, the RBI delivered a 25-bps rate cut while simultaneously unveiling durable liquidity measures. The combination has raised a key question in markets: Is the central bank signalling concerns about a potential liquidity crunch toward the end of December?

The timing is noteworthy because the RBI’s durable liquidity package through OMO purchases and USD/INR Buy/Sell swap auctions, which fall just as the banking system gears up for heavy advance tax and GST outflow periods that usually squeeze liquidity.

By moving now, the central bank is effectively cushioning the system, ensuring smoother liquidity conditions and minimising pressure on short-term rates.

December typically brings a large liquidity drain, often nearing Rs 3 lakh crore, driven by advance tax and GST outflows. Such heavy withdrawals push up short-term money market rates and weaken the transmission of a policy rate cut.

By injecting liquidity during this period, the RBI aims to keep overnight and short-term rates aligned with the repo rate, ensuring that system liquidity remains comfortable and the impact of the rate cut is transmitted more effectively across the financial system.

What liquidity measures are announced?

While announcing the monetary policy, the central bank announced two measures for infusing durable liquidity into the banking system.

The central bank announced OMO purchase auctions of Government of India securities for an aggregate amount of Rs 1 lakh crore in two tranches of Rs 50,000 crore each to be held on December 11, 2025, and December 18, 2025.

Further, a USD/INR Buy/Sell Swap auction of $5 billion for a tenor of three years is to be held on December 16, 2025.

Both these auction dates are close to advance tax and GST tax payments, which fall on the 15th of December and the 20th of December, respectively.

Impact of OMO purchases on bonds?

The OMO purchase operation by the RBI often helps the banking system to get durable liquidity and reduces bond yields.

The central bank has so far conducted Rs 27,280 crore worth of OMO purchases in the secondary market. According to the RBI data, the central bank conducted Rs 14,810 crore OMOP purchases between November 10 and November 13, and Rs 12,470 crore between November 4 and November 7.

On December 5, Moneycontrol have reported that as the defence of the Indian rupee intensifies through sustained intervention by the Reserve Bank of India (RBI), liquidity conditions in the domestic banking system have come under strain. With dollar sales tightening rupee liquidity, the bond market is increasingly pricing in the possibility of an Open Market Operation (OMO) purchase of government securities in the December monetary policy review to ease system-level liquidity stress.

Impact of the swap auction on the rupee?

Treasury heads said that the USD/INR Buy/Sell Swap auction will have a direct impact on the forward premia rates and not on the spot rate. This is because, operation increases the supply of dollars in the forward market while injecting rupee liquidity into the banking system, effectively reducing hedging costs and influencing market expectations.

Experts also said that the swap auction is expected to provide a Rs 45,000-Rs 50,000 crore durable liquidity to the banking system.

“USD/INR Buy/Sell swap auction is more of a liquidity measure, and not to support the rupee,” said RBI Governor Sanjay Malhotra during the post-policy press conference.

Malhotra added that as long as transmission of rates is happening, we will provide sufficient liquidity. “Otherwise, we don’t need so much liquidity.”