RBI to Inject ₹2.9 Lakh Crore Into Banking System, Bond Yields Ease

The Reserve Bank of India (RBI) has announced fresh measures to inject INR 2.9 lakh crore into the banking system, aiming to ease tight liquidity conditions and calm bond markets ahead of the year-end.

The move comes at a time when banks have been facing cash pressure due to tax outflows, higher government spending, and strong credit demand. Market participants welcomed the announcement, with government bond prices rising and yields falling shortly after the news.

What the RBI Has Announced

The RBI will add liquidity through two main routes over the coming weeks.

First, the central bank will purchase government bonds worth INR 2 lakh crore through open market operations. These purchases will be carried out in multiple tranches starting December 29, extending into January.

Second, the RBI will conduct a $10 billion dollar-rupee swap with a three-year maturity. Under this arrangement, banks will sell dollars to the RBI in exchange for rupees, with an agreement to reverse the transaction later. This will inject additional rupee liquidity into the system while helping the RBI manage foreign exchange flows.

Together, these steps are expected to add nearly INR 2.9 lakh crore to the banking system.

Why Liquidity Was Tight

Liquidity conditions have been under strain in recent weeks. Banks saw large outflows due to advance tax payments, while demand for credit remained strong. This pushed short-term interest rates above the RBI’s comfort level.

When liquidity tightens, borrowing becomes more expensive, and bond yields tend to rise. The RBI’s intervention is meant to prevent that and ensure that banks have enough funds to lend smoothly.

How Markets Have Reacted

Bond markets responded positively to the announcement. The benchmark 10-year government bond yield eased, reflecting expectations that surplus liquidity will bring borrowing costs down.

Traders described the move as timely, especially as markets typically remain thinly traded during the year-end holiday period. Some dealers referred to the rally as a “Santa Claus effect”, driven by the RBI’s support.

Lower bond yields also help the government by reducing borrowing costs and improving overall market confidence.

What This Means for the Economy

The liquidity infusion is expected to support credit growth and stabilise money market rates in the near term. It also signals that the RBI is willing to step in quickly if cash conditions tighten further.

For borrowers, softer bond yields can eventually translate into lower interest rates. For banks, easier liquidity reduces funding stress and improves lending capacity.

While the RBI has not indicated whether more measures will follow, analysts believe the central bank will continue to monitor conditions closely, especially as the new financial year approaches.

Overall, the move reinforces the RBI’s focus on maintaining financial stability while supporting economic activity during a busy period for markets.