RBI’s ₹2.5 trillion liquidity infusion sends mixed signals: SBI Research | Economy & Policy News

The Reserve Bank of India’s (RBI’s) decision to inject ₹2.5 trillion into the banking system through repo auctions, even as it signals a calibrated monetary tightening cycle, has sent contradictory signals on liquidity management, according to a report by SBI Research. The report said the RBI appeared to be balancing multiple, potentially conflicting objectives, with its liquidity operations raising questions about the consistency of its policy stance.

 

“We are getting contradictory signals from RBI on the liquidity management front,” the report said, pointing to the central bank’s continued emphasis on calibrated tightening alongside three repo auctions conducted from October 19 onwards to inject a total of ₹2.5 trillion into the banking system.

 

The report questioned whether the RBI was moving away from calibrated tightening towards what it described as “mildly calibrated tightening”. It argued that the simultaneous use of liquidity injection and withdrawal measures could complicate the transmission of the central bank’s monetary policy signals to financial markets.

 

SBI Research said the RBI had maintained the requirement for daily call money rates to remain at 99 per cent of the policy rate, alongside regular open market operation (OMO) and variable rate reverse repo (VRRR) operations. These measures, it said, indicated that the central bank was pursuing a calibrated tightening approach.

 

The substantial liquidity injection through repo auctions, however, appeared inconsistent with that approach, particularly after the RBI’s October monetary policy placed greater emphasis on inflation risks and the need for policy recalibration.

 

The report highlighted that while concerns about financial stability might have influenced the liquidity operations, the RBI would be better served by avoiding a two-way liquidity management policy involving simultaneous injection and withdrawal.

 

SBI Research argued that such a two-way approach was more appropriate for exchange rate management than for liquidity management. It reiterated its recommendation for widening the liquidity adjustment facility (LAF) corridor, which, it said, could act as an automatic stabiliser during periods of uncertainty.

 

Despite the decline in US Treasury yields, SBI Research highlighted that Indian government bond yields were unlikely to fall significantly, with the 10-year government security yield expected to remain elevated at around 7.6 per cent at the higher end for now.

 

The report said the RBI’s liquidity injection and its decision to cancel all Treasury bill auctions could be interpreted by market participants as attempts to fine-tune movements in yields. However, it argued that domestic bond yields would remain under pressure because of elevated crude oil prices and the likelihood of a renewed rise in US Treasury yields.

 

The report added that the spread between Indian and US government bond yields, at around 250 basis points, was finally moving towards normalisation.

 

Meanwhile, SBI Research said the rupee had appreciated by around 2 per cent from its low of 96.8 per dollar recorded on May 20, while remaining marginally weaker than its level on March 31, 2026. The report said the RBI’s decision to move the operating rate to the upper end of the policy corridor was appropriate in signalling a tightening cycle. It argued that the move had helped reinforce the monetary policy signal while supporting the currency.