The Reserve Bank of India stands at a critical inflection point. Over the past year, its liquidity management has introduced avoidable volatility in financial markets, leaving banks uncertain, credit transmission impaired, and economic expansion vulnerable. While the central bank has remained laser-focused on inflation control, its unwillingness to replenish liquidity drained through forex interventions and government cash balances has aggravated market instability.Now, with inflation well within tolerable limits and global growth risks escalating, the RBI has an opportune moment to recalibrate its approach before economic momentum weakens. The recent forex swap operations and open market purchases provided welcome relief, but these must not remain isolated interventions. A more responsive liquidity framework—one that dynamically offsets the liquidity impact of forex interventions and fiscal outflows—would have prevented the recent disruptions. Instead, the RBI has allowed liquidity to tighten unpredictably, forcing banks into short-term funding stress and slowing credit expansion at precisely the wrong moment.
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