Core Insights - The Reserve Bank of India (RBI) aims to encourage banks to lower lending rates and boost credit demand through liquidity measures [1][8] - The banking system has been in liquidity deficit since mid-December, leading banks to borrow daily from the RBI despite a recent 25-basis-point policy rate cut [1][8] Liquidity Measures - RBI plans to maintain a liquidity surplus of 1% of net demand and time liabilities (NDTL), which currently amounts to ₹2.5 lakh crore, until March 2026 [2][8] - There is potential for an additional ₹1 lakh crore of open market operation (OMO) purchases in February-March 2026 to sustain this liquidity surplus [2][8] Recent Actions - On December 23, RBI announced a liquidity infusion of ₹2.9 lakh crore between December-end and January, including bond purchases through OMOs in four tranches of ₹50,000 crore each and a $10 billion buy-sell forex swap [6][8] - These measures are designed to counteract liquidity drains caused by foreign exchange interventions and tax outflows, which turned liquidity into deficit after advance tax payments in mid-December [6][8] Future Outlook - Elevated core liquidity, currently at ₹3.7 lakh crore, suggests that the banking system may return to surplus by the end of December as government spending increases [7][8] - RBI's strategy includes using OMOs and forex swaps to ensure smooth monetary transmission and support economic growth amid low inflation [7][8] Tools and Mechanisms - The Variable Rate Repo (VRR) and Variable Rate Reverse Repo (VRRR) are tools used by RBI for short-term funding and to stabilize short-term interest rates, respectively [8]