Economic Outlook - The Reserve Bank of India (RBI) is expected to maintain its repo rate in the upcoming February policy meeting, awaiting new parameters that will influence inflation and growth metrics in the revised base-year series [1][5] - The December consumer inflation rate was recorded at 1.33%, with Q3 inflation averaging 0.8%, which is 20 basis points higher than the RBI's forecast of 0.6% for Q3 [1][5] - Economists anticipate a similar upward adjustment in the RBI's Q4 inflation forecast, currently set at 2.9% [1][5] Monetary Policy and Liquidity - The RBI has cumulatively reduced policy rates by 125 basis points since February 2025, bringing the rate down to 5.25% [1][5] - Economists do not foresee further rate cuts in the near term, predicting inflation could exceed 4% over the next four quarters [1][5] - There is an expectation for the RBI to inject additional liquidity through open market operations (OMO) to maintain systemic liquidity in surplus [1][5] System Liquidity - System liquidity shifted to a deficit in the latter half of December but has averaged a tight surplus of ₹36,869 crore in January [5] - Soumya Kanti Ghosh, chief economic advisor at State Bank of India, forecasts approximately ₹2 lakh crore of OMO for the remainder of FY26, with a similar trend expected in the following fiscal year [5] - Radhika Rao, senior economist at DBS Bank, indicated that additional tranches of OMOs and FX swaps are anticipated to address liquidity drains caused by foreign exchange interventions [5]

Core Insights - The Reserve Bank of India (RBI) announced open market operation (OMO) purchases and dollar-rupee buy-sell swaps to enhance banking system liquidity, targeting a desired liquidity level of 1% of net demand and time liabilities (NDTL) [4] - The RBI plans to inject ₹1.45 lakh crore into the banking system through OMO purchases of ₹1 lakh crore in two tranches of ₹50,000 crore each on December 11 and 18 [4] - Average system liquidity was reported at ₹1.68 lakh crore in November and ₹2.63 lakh crore in December so far, indicating a significant liquidity strain due to foreign-exchange interventions and seasonal currency leakage [4] Group 1 - The RBI's liquidity infusion is strategically timed to coincide with quarterly advance tax outflows expected in the third week of December [4] - The first tranche of OMO will involve the buyback of seven government securities maturing from 2029 to 2050 [3] - RBI Governor Sanjay Malhotra emphasized that the primary purpose of OMOs is to provide sufficient liquidity rather than to influence government securities yields [4] Group 2 - Economists noted that the recent liquidity measures are essential for ensuring adequate and durable liquidity in the banking system, facilitating monetary transmission [4] - The RBI's actions are perceived as a frontloading of potential rate cuts, indicating awareness of government securities yields [4] - The forex swap for $5 billion will have a tenure of three years, with the first leg of the transaction scheduled for December 16 [4]