RBI’s big plan
The Reserve Bank of India has reduced the repo rate by a huge 25 basis points to 5.25%. A total reduction of 125 basis points has been made from February 2025 till now. This decision was taken completely unanimously, that is, all six members of the Monetary Policy Committee voted in favor of reducing the interest rate.
RBI Governor Malhotra said that inflation has come down rapidly in the last few months and now it has gone below the comfort range set by the central bank. On the other hand, the country’s economic growth remains strong. This combination of low inflation and fast growth gives the central bank an opportunity to soften the policy. For this reason, along with reducing the repo rate, RBI has announced two major measures to increase liquidity in the markets.
Big move by RBI to increase liquidity in the market
This time, RBI has announced to buy bonds worth Rs 1 lakh crore and also forex swap worth Rs 4,50,000 crore to ease the availability of money in the system. The objective of both these steps is to ensure that banks have sufficient cash, so that the benefits of rate cuts can reach customers quickly and completely. When there is more money in the banking system, loans become cheaper, new funding increases and both companies and households get relief.
Why is RBI doing dollar-rupee swap?
Forex swap is a way in which RBI can increase the supply of rupees in the system without having any long-term impact. Under this swap, RBI will now sell dollars and put the rupees into the banking system. Later, RBI will buy back dollars at the scheduled time. This process brings huge liquidity to the market temporarily, but in the long run, RBI often stabilizes the market without increasing the inflow of rupees.
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This step is especially useful at a time when the rupee is under pressure. Recently the rupee had touched a record low of 90.42. Although there was a slight recovery immediately after due to selling of dollars by government and foreign banks, most experts still believe that the rupee remains in a weak trend. In such a situation, the dollar-rupee swap works to support the rupee and helps in preventing sudden falls.
GDP data and caution of markets
Before the policy meeting, India’s stronger than expected GDP data had put traders on alert. Many traders had already placed bets that RBI would cut rates and the rupee crossing 90 had further strengthened this fear. Therefore, the effect of RBI’s policy was visible in the spot market as well as the forward market. There has been a sharp rise in the dollar-rupee forward premium in recent times, indicating expectations of further reduction in liquidity.
Bond and stock market reaction
The bond market immediately reacted positively after the RBI announcements. The 10-year government bond yield fell to 6.51%. However, the equity market remained completely calm and no major changes were seen in Nifty 50. It is clear from this that at present the market’s focus is more on the rupee and liquidity situation.