RBI’s ₹1.9 Lakh Crore Liquidity Infusion Expected to Lower Lending Rates
The Reserve Bank of India (RBI) has implemented significant liquidity infusion measures aimed at stimulating economic growth and potentially leading to a reduction in lending rates sooner than anticipated. These measures are designed to alleviate liquidity constraints in the banking system, thereby enabling banks to lower borrowing costs for consumers and businesses.
To address the liquidity deficit, the RBI announced a substantial liquidity infusion totaling approximately ₹1.9 lakh crore (equivalent to $21 billion). This initiative includes conducting two open market operations (OMOs) worth ₹1 trillion on March 12 and 18, and a dollar-rupee buy-sell swap worth $10 billion on March 24. These measures are intended to inject liquidity into the banking system, ensuring that banks have sufficient funds to meet lending demands.
The infusion of liquidity is expected to lower short-term borrowing costs for banks, particularly for instruments such as certificates of deposit (CDs) and commercial paper (CP). As banks’ cost of capital decreases, they are likely to pass on the benefits to borrowers by reducing lending rates. This development could lead to a more favorable lending environment, encouraging increased borrowing and investment.
The RBI’s decision to infuse liquidity is influenced by several factors:
1. Economic Growth Concerns: India’s economy grew by 6.2% in the October-December quarter, and there are ongoing efforts to sustain and accelerate this growth.
2. Inflation Trends: Retail inflation fell below 4% in February 2025, the first time in six months, largely due to declining vegetable prices. This benign inflation environment provides the RBI with the flexibility to implement growth-supportive measures without the immediate concern of triggering high inflation.
3. Liquidity Deficit: The banking system has been experiencing a liquidity deficit since mid-December, exacerbated by factors such as tax outflows and the RBI’s foreign exchange operations. The liquidity infusion aims to address this deficit, ensuring that banks have adequate funds to support lending activities.
The RBI’s proactive liquidity infusion measures reflect a strategic approach to support economic growth by ensuring adequate liquidity in the banking system. By lowering short-term borrowing costs, these measures are expected to lead to reduced lending rates, thereby encouraging borrowing and investment. As the measures take effect, their impact on various economic indicators will be closely monitored to assess their effectiveness in achieving the desired economic outcomes.
