Following a review of evolving financial conditions, the Reserve Bank of India announced a package of liquidity operations that will inject over ₹2 lakh crore (about $23 billion) into the banking system. The measures include large-scale open market purchases of government securities, a USD-INR buy/sell swap to add durable rupee liquidity, and a 90-day variable rate repo auction allowing banks to access funds against collateral at market-determined rates.
These tools were aimed at easing funding pressures, improving systemic liquidity and ensuring orderly money-market conditions without immediately altering the monetary policy rate.
The Monetary Policy Committee meeting that happened between 4th to 6th February, 2026 decided to keep the repo rate unchanged at 5.25% and retained a neutral stance. The committee observed that domestic growth remains resilient. On the domestic front, real gross domestic product (GDP), as per the First Advance Estimates (FAE), is estimated to grow at 7.4 per cent (y-o-y) in 2025-26. Inflation is currently benign and close to target, therefore the existing policy rate was considered appropriate rather than immediately cutting rates. The committee noted that inflation has moderated and is currently near the target but is projected to firm up gradually, while economic activity and credit growth remain robust. CPI inflation is projected at 4.0% in Q1:2026–27 and 4.2% in Q2, with underlying price pressures—excluding precious metals—remaining subdued and overall risks assessed as balanced. The marginal upward revision in the inflation outlook largely reflects higher precious metal prices, accounting for roughly 60–70 basis points, while core inflationary pressures remain subdued.
It also assessed that financial conditions are already supportive, aided by ample liquidity in the banking system. Given these circumstances, the MPC judged that an immediate rate cut could overstimulate demand and create future inflationary pressures, and therefore preferred to monitor incoming data before initiating an easing cycle.
The fall of the tri-party repo (TREPS) rate below the Standing Deposit Facility (SDF) reflects a sharp surplus of liquidity in the banking system after RBI’s cash infusion. Overnight market rates declined so much that banks began borrowing cheaply in the market and parking the funds back with the RBI at the higher SDF rate, creating a profitable arbitrage opportunity.
The spread between TREPS and SDF widened to as much as 75 basis points, and banks parked nearly 5 lakh crore with the central bank instead of extending loans, indicating that liquidity has exceeded immediate credit demand. While this confirms highly accommodative financial conditions, it also weakens monetary transmission because funds circulate within the financial system rather than reaching businesses. Therefore, going forward the RBI may need to gradually absorb excess liquidity or recalibrate liquidity operations so that surplus funds move toward productive lending instead of risk-free parking.