RBI to Inject Record ₹2.5 Lakh Crore into Banking System Amid FX Intervention

The Reserve Bank of India (RBI) will inject a record ₹2.5 lakh crore ($28.85 billion) into the banking system on February 14, 2025, through an overnight variable rate repo (VRR) auction. This will be the largest single-day infusion of liquidity in over a year, following the central bank’s aggressive foreign exchange (FX) interventions over the past two trading sessions. The move comes as India's banking system faces a severe liquidity deficit, which has quadrupled in less than a week to nearly ₹2 lakh crore as of February 10, 2025.

Liquidity Crunch and RBI’s Response

India’s banking system has been grappling with a sharp liquidity shortfall, driven by corporate tax outflows and RBI’s heavy dollar sales to stabilize the rupee. To counter this deficit, the RBI has opted for an overnight repo auction, which allows banks to borrow short-term funds from the central bank against government securities.

The ₹2.5 lakh crore liquidity injection aims to ensure that banks have sufficient cash to meet their short-term lending requirements and prevent disruptions in the financial system. The size of the infusion signals the RBI’s commitment to maintaining stability amid increasing global market uncertainties.

Aggressive FX Intervention to Support the Rupee

The RBI's move follows its aggressive intervention in the foreign exchange market, where it sold between $4 billion and $7 billion on February 12, 2025. This intervention was aimed at curbing volatility in the rupee, which has been under pressure due to persistent foreign portfolio outflows and renewed trade tensions between the U.S. and India.

The rupee had hit a record low of 88 per U.S. dollar on February 10, prompting the central bank to step in. The currency has since rebounded slightly but remains vulnerable to external shocks, including U.S. Federal Reserve policy decisions and uncertainty surrounding trade tariffs imposed by the Biden administration.

Why the Banking System Faces a Liquidity Deficit

The sharp rise in the liquidity deficit is attributed to multiple factors:

• Tax Outflows – Indian companies recently made large payments for advance corporate taxes, which temporarily drained liquidity from the banking system.
• Foreign Capital Outflows – Foreign institutional investors (FIIs) have been withdrawing funds from Indian equities, leading to reduced dollar inflows into the financial system.
• RBI’s FX Market Intervention – The central bank has been selling large amounts of dollars to prevent excessive rupee depreciation, which has further tightened liquidity conditions.

Market Reaction and Economic Impact

Traders and market analysts welcomed the RBI’s move, noting that the liquidity infusion would help prevent any major credit crunch and keep short-term interest rates stable. However, the long-term impact of RBI’s intervention will depend on global market conditions and whether foreign capital returns to Indian markets.

Some economists believe that excessive liquidity injections could lead to inflationary pressures, especially if the banking system remains in a persistent deficit. However, given the RBI’s careful policy balancing, the move is expected to be temporary rather than a shift toward prolonged monetary easing.

Conclusion

The RBI’s ₹2.5 lakh crore liquidity infusion marks a proactive response to the recent surge in banking system liquidity shortages, caused by tax outflows and aggressive FX market interventions. While the move is aimed at stabilizing the rupee and preventing credit shortages, its effectiveness will depend on external economic conditions and foreign investor sentiment. The Indian economy remains resilient, but uncertainties around global trade policies and U.S. monetary policy could continue to drive volatility in the coming weeks.