RBI May Need More Liquidity Infusion In Feb–Mar As Short-Term Rates Rise

The Reserve Bank of India may have to inject additional liquidity in February and March to cool rising short-term borrowing costs and stabilise yields on one- to five-year government bonds, market participants

told The Economic Times.

Despite a Rs 3 lakh crore liquidity infusion in December and January so far, tight system liquidity has kept pressure on money market rates, especially certificates of deposit (CDs) and commercial paper (CP).

Short-Term Rates Spike Amid Tight Liquidity

According to RBI data, CP rates jumped sharply to 13.53 per cent by end-December from 9.71 per cent in November — a rise of over 380 basis points. CD rates also moved up to 6.87 per cent from 6.46 per cent during the same period. One-year CDs were trading around 6.95 per cent on Friday.

Market participants said liquidity has remained under strain since mid-December due to subdued government spending, sustained forex market intervention by the central bank, and a pickup in credit demand.

Why Liquidity Remains Under Pressure

Traders and bankers pointed out that while the RBI has already infused liquidity, the measures have not been enough to offset the combined impact of lower government cash outflows and higher demand for funds from banks and companies. As a result, short-term instruments such as CPs and CDs continue to price in tight liquidity conditions.

RBI Steps In With Liquidity Measures

To manage liquidity and financial conditions, the RBI recently announced a fresh set of operations. These include open market operation (OMO) purchase auctions of government securities worth Rs 2 lakh crore, to be conducted in four tranches of Rs 50,000 crore each between December 29, 2025 and January 22, 2026.

In addition, the central bank will conduct a USD 10 billion USD/INR buy-sell swap auction with a three-year tenor on January 13, 2026.

More Action Likely

Market participants expect the RBI to remain active in the coming months. According to the ET report, further liquidity support in February and March may be needed to anchor short-term borrowing costs and ensure stability across the yield curve.