The Reserve Bank of India has moved aggressively to stabilise financial sentiment after the rupee hit an all-time low last week, deploying a mix of rate cuts and liquidity tools aimed at cooling volatility rather than reversing global pressures. The package — a 25-basis-point policy rate reduction, ₹1 lakh crore in open-market bond purchases in December, and a USD 5 billion buy-sell swap — is meant to calm markets by ensuring abundant funding and signalling that the central bank is willing to lean against disorderly currency moves.
The open-market purchases are designed to inject cash directly into banks. When the RBI buys government securities, it pays banks upfront, easing money-market rates and preventing a liquidity squeeze. Tight funding conditions tend to amplify pressure on the rupee because global investors become more cautious when domestic money markets look strained. The scale of the OMO programme indicates a deliberate attempt to show that credit and funding conditions will remain comfortable.
The dollar swap complements this effort by releasing rupee liquidity without depleting foreign-exchange reserves permanently. By buying dollars now and agreeing to sell them back later, the RBI creates rupee liquidity immediately while demonstrating that it is prepared to absorb sudden spikes in currency volatility.
Economists say inflation’s sharp decline has given the central bank space to act. Large reserves — now near USD 686 billion — further reinforce the impression that the RBI is managing volatility from a position of strength. Some strategists also argue that the rupee looks undervalued at current levels, interpreting the rate cut as a sign of confidence rather than capitulation.
Liquidity support alone cannot strengthen the currency — its purpose is to prevent panic selling and a self-reinforcing slide. Smooth money markets reduce the risk of abrupt foreign-investment outflows and help anchor expectations. The real direction of the rupee will still depend heavily on global forces, particularly the US interest-rate cycle, capital flows and geopolitical tensions.
For now, the RBI is using what it views as a rare policy window: low inflation and resilient growth allow it to support the domestic economy while also attempting to cool currency volatility. The liquidity injection has bought time and stability. Whether the rupee rebounds or simply slows its decline will ultimately be dictated by external conditions rather than domestic policy alone.
