RBI’s Liquidity Lifeline: How Cash Infusions Outpace Rate Cuts in Cutting Borrowing Costs

The Reserve Bank of India (RBI) has long been the architect of India’s monetary policy, but in 2025, its playbook shifted dramatically. While rate cuts grabbed headlines, it was the RBI’s aggressive liquidity measures—injecting over ₹4.5 lakh crore into the system—that delivered the most meaningful relief to borrowers. This article dissects how cash surges, not just interest rate reductions, are reshaping India’s borrowing landscape, and what it means for investors.

The Liquidity Surge: A Silent Revolution in Borrowing Costs

The RBI’s liquidity measures began in earnest in early 2025, targeting systemic imbalances that rate cuts alone couldn’t address. By mid-March, the central bank had injected ₹6.9 lakh crore through the Liquidity Adjustment Facility (LAF), transforming a ₹3.1 lakh crore deficit into a ₹1.5 lakh crore surplus by April. This flood of liquidity directly lowered the Weighted Average Call Rate (WACR), a key short-term borrowing metric, from 6.81% in January to 6.21% by March 12—nearly matching the repo rate of 6.25%.

The impact rippled through corporate borrowing channels. Spreads between Commercial Papers (CPs) and Certificates of Deposit (CDs) relative to the 91-day Treasury Bill narrowed significantly. For instance, the three-month CD rate, which had spiked by 25–30 basis points in December 2024, began to retreat as liquidity improved. This environment made short-term corporate debt cheaper, easing cash flow pressures for businesses.

Rate Cuts: A Necessary but Lagging Tool

The RBI’s two rate cuts in early 2025—reducing the repo rate by 50 basis points to 6%—were critical in signaling a shift toward accommodative policy. Home loan borrowers, for example, saw rates drop from ~9% to ~8.5%, saving thousands in EMIs. Auto loans also became cheaper, yet sales stagnated due to broader economic headwinds.

However, the transmission of these cuts to broader lending rates faced hurdles. Banks, grappling with sticky deposit costs and risk-averse lending practices, delayed passing on savings to borrowers. Analysts like Soumyajit Niyogi of India Ratings noted that meaningful declines in short-term rates (e.g., CDs) would likely emerge only in FY2026, as prolonged liquidity support finally pressured banks to lower lending margins.

Where the Real Impact Lies: Sectors and Structural Challenges

While liquidity measures eased short-term borrowing costs, structural issues in key sectors limited their full potential.

• Housing: Despite lower loan rates, residential property prices surged by 10–34% in top cities, outpacing the benefits of cheaper EMIs. Sales fell 12–15% YoY in Q1 2025, as affordability constraints outweighed monetary relief.
• Automobiles: Auto sales dropped 7% YoY in February 2025, with rural buyers facing stagnant wages and urban consumers hesitating amid job market uncertainty.

The Synergy of Liquidity and Rate Cuts

The RBI’s dual strategy—liquidity surges paired with rate cuts—created a virtuous cycle. The April 2025 policy forecast 6.5% GDP growth and 4.0% inflation, giving policymakers room to ease further. The liquidity surplus ensured that lower policy rates translated into market realities: the WACR aligned with the repo rate, and corporate bond yields fell.

Externally, the RBI’s actions bolstered foreign exchange reserves to ₹676.3 billion by April 2025, stabilizing the current account deficit at a manageable 3% of GDP. This resilience shielded India from global volatility, such as U.S. tariffs on Indian exports and oil price swings.

The Remaining Hurdles

Despite progress, challenges loom:
1. Consumer Confidence: Households remain cautious, with stagnant wages and inflation fears dampening spending.
2. Sectoral Disparities: Rural two-wheeler sales slowed as agricultural incomes plateaued, while mid-market housing struggles with affordability.
3. Global Risks: Weather-related supply disruptions and trade tensions could reignite inflation, limiting further easing.

Conclusion: A Path Forward Requires More Than Money

The RBI’s liquidity measures have been the unsung heroes of 2025, trimming borrowing costs more effectively than rate cuts alone. The ₹4.5 lakh crore infusion via OMO, forex swaps, and LAF, coupled with two rate cuts totaling 50 basis points, created a stable financial backdrop. However, structural reforms—like addressing real estate oversupply and boosting rural incomes—are essential to unlock India’s consumption-driven growth.

For investors, the data is clear: sectors tied to banking liquidity (e.g., NIFTY Bank) and corporate debt (CDs/CPs) stand to benefit from sustained surplus conditions. Meanwhile, sectors like housing and automobiles require more than cheap loans—they need price discipline and income growth. The RBI’s efforts have laid the groundwork, but the next chapter hinges on fiscal and structural policies to turn liquidity into lasting prosperity.

In 2025, cash is king. But without complementary reforms, even the most generous liquidity injections may fall short.