To manage liquidity conditions, the Reserve Bank of India (RBI) has announced to conduct of an open market purchase auction worth Rs 1 lakh crore and a USD/INR swap auction worth $10 billion in the coming days. The measure is going to influence liquidity in the banking system and control inflation. But did you know the measure can also have an impact on interest rates offered by banks?

Open Market Purchase:

As per the RBI statement, OMO purchase will be of government securities for an aggregate amount of Rs 1,00,000 crore. This will be carried in two tranches of Rs 50,000 crore each. The OMO purchases will be carried on March 12 and March 18.

USD/INR Swap:

Additionally, RBI announced a USD/INR Buy/Sell Swap auction of USD 10 billion for a tenor of thirty-six months. This move comes amidst a weak rupee which is currently trading near its record low of 88 against the US dollar. RBI has intervened on several occasions to tame the weakening of the currency.

Depreciation in the rupee poses an inflation risk.

Sonal Badhan, Economist, Bank of Baroda said, “If volatile items of CPI especially vegetable inflation continue to play in favour, alignment to the inflation target seems feasible. Our forecast also looks at progressive alignment to the 4% level. However, upside risks emanate from a depreciating rupee which poses risks of imported inflation and bottoming out of the commodity price cycle from threats of tariff imposed by the US. We expect CPI to settle at ~4.9% in FY25 and 4.6% in FY26, with risks tilted to the upside.”

The USD/INR swap will be held on March 24, 2025.

Overall, RBI said, it will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions.

What are Open Market Operations?

OMO is a well-known practice by central banks globally to manage liquidity. RBI purchases or sells government securities in an open market, meaning any financial institutions like banks or NBFCs apart from investors can bid. The move is to control money supply.

When RBI buys government securities, they are injecting liquidity into the banking system. In the case of selling government securities, RBI is absorbing money from the banking sector. Notably, this plays a major role in the interest rates of banks.

During OMO purchases, liquidity comes into banking systems, and this pushes banks to lower interest rates as well. In the case of selling, with money flowing out of the banking system, banks generally raise interest rates.

In the latest RBI minutes of the meeting, MPC member Saugata Bhattacharya said, “One instrument for inducing increased demand for credit from this sector is lowering the borrowing cost. Transmission of a policy repo rate cut to borrowing costs for MSMEs, given EBLR pricing, is likely to be relatively quick. In addition, RBI’s liquidity infusion measures are likely to gradually ease MCLR-based borrowing costs, thereby reducing Weighted Average Lending Rates (WALR).”

RBI’s latest monetary policy highlighted that after remaining in surplus from July to November 2024, system liquidity – as measured by the average net position under the liquidity adjustment facility (LAF) – turned into a deficit between December 2024 and January 2025. The drainage of liquidity is mainly attributed to advance tax payments in December 2024, capital outflows, forex operations and a significant pickup in currency in circulation in January this year.

However, under OMO purchase, when liquidity is injected into banking and financial institutions, the lower interest rates make other investment instruments attractive such as the equity market compared to the fixed-income-based investments.

As per Bajaj Finserv report, some of the common sectors that benefit are — housing and real estate sector, consumer goods, automobiles, hospitality & tourism, retail, and capital-intensive industries.

If the OMOs are sold to banks, which in return raises rates, then demand for stocks is impacted as investors who wish for high-return, guaranteed and risk-free savings would chose to park their money with fixed income assets like FDs and more.

This case will be different for lending rates though. During OMO purchase, lower rates will make term loans like personal loans, home loans and auto loans attractive as EMIs will be cheaper. This will be opposite in case of OMO selling by RBI.