OMO Injections and VRRR Drains Can Run Side by Side

The Reserve Bank of India has said that although it is infusing liquidity through open market bond purchases, it may simultaneously drain liquidity through variable rate reverse repos. Governor Sanjay Malhotra said the two sets of operations serve different purposes and should not be viewed as contradictory.

Malhotra announced plans to buy ₹1 trillion of government securities and conduct a three-year, buy-sell dollar/rupee swap of $5 billion during December. These measures are intended to add durable liquidity to the banking system at a time when inflation has moderated sharply, and monetary transmission is progressing.

According to the Governor, open market purchases influence the long-term liquidity conditions of the system, while variable rate reverse repos are used to manage day-to-day movements in liquidity so that the weighted average call rate remains aligned with the policy rate. He noted that it is entirely possible to inject durable liquidity through bond purchases and simultaneously absorb transient liquidity through a short-tenor reverse repo, depending on evolving conditions.

Malhotra also reiterated that the policy repo rate remains the central instrument of monetary policy. The aim of the Reserve Bank’s bond purchases is to ensure adequate liquidity rather than guide government bond yields.

The Governor said the Reserve Bank continuously assesses liquidity needs arising from currency in circulation, foreign exchange operations and reserve maintenance. The planned operations in December are intended to keep liquidity sufficient while supporting orderly conditions in money and bond markets.