RBI’s liquidity infusion: It may relieve the symptom but not the real problem that Indian banking must confront

In plain language, this means that the lending or investment activity of banks must be based on deposits mobilized from people. But the Reserve Bank of India’s (RBI) frequent moves to infuse banks with large quantums of liquidity on a nearly systemic basis seems to fly in the face of that premise.

True, all central banks are charged with managing the level of liquidity in an economy such that it is neither too much nor too little, but just sufficient to keep the economy humming, given the expected level of activity.

This entails their engaging in what are known as ‘open market operations’ (OMOs), mainly the buying and selling of securities to infuse and withdraw liquidity respectively, depending on the underlying macroeconomic conditions.

But is that the case today? In early December, system liquidity had been in surplus of an average ₹1.5 trillion during the period since RBI’s Monetary Policy Committee met in October 2025.

Despite this, in its policy announcement of 5 December, the central bank said it would conduct OMO purchases of government securities (G-Secs) amounting to ₹1 trillion this month, apart from 3-year dollar-rupee buy-sell swaps of $5 billion—only to double the quantum of both within a space of less than three weeks.

Last Tuesday, RBI announced OMO G-Sec purchases of ₹2 trillion and a forex swap auction of $10 billion for a tenor of 3 years to be held on 13 January 2026. While bankers say liquidity typically tightens as the year nears its end, RBI has not explained what has changed to make it literally double down on infusion.

Yes, like other central banks, RBI is expected to function as a lender of last resort. So, while the call money market takes care of temporary gaps in liquidity among banks, they may need to turn to the central bank to tide over an exceptional crunch that cannot be resolved by borrowing overnight funds from each other.

But when RBI becomes the lender of first resort instead of last, as seems to be the case now, we need to pause and ponder.

Is RBI treating the symptom rather than the cause of the problem? Is our liquidity tightness structural—i.e., due to a failure of bank deposits to keep pace with the money that banks need? As noted earlier, lenders are supposed to use deposits for lending.

If they are not doing so, it could be either because they are overlending (or over-investing) or not paying high enough interest rates on deposits to compete with other forms of investment.

RBI Governor Sanjay Malhotra has said that the share of savings flowing into bank deposits has been falling steadily; it has dropped from 43% to 35% over the past nine years.

Either way, frequent liquidity infusions suggest a worrisome dependence of banks on RBI money, rather than deposits, for lending and investment. The central bank has often assured banks that it will be “nimble” in its management of liquidity.

But this has begun to sound like a version of the ‘Greenspan put,’ which referred to an unstated assurance in the US of a Fed bailout. We need a proper diagnosis of our liquidity gaps, followed by remedial action. Balms only tend to gloss over structural problems.