The Reserve Bank of India. Photo: AFP
The Reserve Bank of India. Photo: AFP

With the Indian banking system going through a cash crunch and festival season around the corner, the central bank plans to inject liquidity as a remedial measure.

The Reserve Bank of India (RBI) has announced that it will inject 120 billion rupees (US$2.1 billion) into the system through purchase of government bonds on Thursday to meet the festival-season demand. The government will purchase bonds with maturity ranging between 2020 and 2030, Press Trust of India reports.

The auction to purchase government bonds is part of the Open Market Operations (OMO) to manage liquidity in the system, which is facing tightness. It will be done through a multi-security auction using the multiple price method.

The result of the auction will be announced on the same day and payment to successful participants will be made during banking hours on Friday.

The RBI had earlier decided to infuse 360 billion rupees through open market purchase of bonds in October. It plans to hold two more auctions during the third and fourth week of the month.

The current liquidity crunch was triggered after Infrastructure Leasing & Financial Services (IL&FS), a major infrastructure financing and construction company, defaulted on a series of interest payments. This led to concerns that the defaults might lead to the collapse of the country’s financial system and markets.