THE BACK-DOOR TAP: HOW THE RBI IS QUIETLY RE-PLUMBING INDIA’S LIQUIDITY 

October 29, 2025

Parneet Sachdev

Through much of 2025, India has been a study in contrasts: an economy growing faster than most peers yet facing record foreign capital flight. While foreign portfolio investors (FPIs) have sold Indian equities in droves, the Reserve Bank of India (RBI) has responded not with flashy rate cuts, but with a quiet rewiring of the financial system’s plumbing—injecting liquidity through collateral and compliance rather than cash.

WHY THE FOREIGN MONEY IS LEAVING

Foreign portfolio investors have been unwinding their India exposure at an accelerating pace. Between January and September 2025, they sold $17.6 billion (≈ ₹1.46 lakh crore) worth of equities—already exceeding the ₹1.2 lakh crore offloaded during the same period in 2022, according to Reuters (Oct 1 2025).

The reasons are not mysterious. First, valuations have grown frothy: Indian equities have been trading at a 60–70% premium to the MSCI Emerging Markets Index, the highest in a decade (Morgan Stanley Asia Strategy Note, Sept 2025). Second, a series of policy shocks from Washington—new U.S. tariffs of up to 50% on Indian steel, aluminium, and textiles, and a $100,000 H-1B visa petition fee—have darkened the export and IT earnings outlook.

A weaker rupee, which briefly breached ₹85 to the dollar in September (RBI Bulletin, Sept 2025), compounded outflows. Foreign funds that entered at stronger exchange rates are booking profits rather than risking further depreciation.The exit has exposed how dependent India’s trading volume still is on offshore liquidity. When the Securities and Exchange Board of India (SEBI) banned the U.S. market-maker Jane Street in July 2025 for regulatory breaches, index-options turnover plunged by 17–20% in a week, according to Reuters (Jul 10 2025). The episode revealed that a handful of global firms were contributing disproportionate depth to Indian derivatives markets. Once they left, liquidity pockets thinned sharply.

RBI’S COUNTER-MOVE: WORKING THE PLUMBING, NOT THE PUMP

Instead of cutting the policy rate, the RBI has opted for a more intricate manoeuvre—infusing liquidity through rules, not rupees.

In late September, the central bank overhauled its liquidity-management framework, designating the 7-day Variable Rate Repo/Reverse Repo (VRR/VRRR) as the main operation, replacing the earlier 14-day tenor. It also committed to a pre-announced auction calendar, while keeping the Standing Deposit Facility (SDF) as the system’s floor rate and Open Market Operations (OMOs) as the long-term lever.

This allows the RBI to fine-tune liquidity daily without signalling a change in stance. Overnight rates stay tethered to the repo at 5.50%, but excesses can be drained instantly—preserving the appearance of discipline even as liquidity circulates beneath the surface.

Alongside the framework, the RBI unveiled sweeping relaxations in lending against securities (Circular RBI/2025-26/62).

The limit on loans against shares jumped fivefold—from ₹20 lakh to ₹1 crore per borrower.

The IPO-financing cap was raised from ₹10 lakh to ₹25 lakh.

The ceiling on loans against listed debt securities—corporate or sovereign-linked—was abolished entirely.

These steps, reported by Business Standard (Oct 2 2025), effectively allow investors and NBFCs to unlock liquidity against existing assets, creating a secondary credit channel without any overt rate cut.

For the first time, Indian banks have been allowed to finance domestic mergers and acquisitions—a market long dominated by NBFCs and foreign lenders. Bloomberg (Oct 6 2025) estimated this could open a $40 billion credit space. Large conglomerates can now tap home-grown liquidity rather than depend on expensive offshore syndicates.

The RBI also announced that the 2016 large-borrower disincentive guidelines—which restricted banks from lending beyond ₹10,000 crore to a single corporate group—will be withdrawn by April 1, 2026, to align with the refined Large Exposures Framework. This gives banks time to strengthen risk models before assuming higher exposure.

WHY THIS FEELS LIKE A BACK-DOOR STIMULUS

The cumulative effect of these measures is unmistakable: the RBI is loosening financial conditions without touching the repo rate. The central banks infuse more money in the market directly by reducing interest rates, printing more money, and setting lower bank reserve requirements. They also use quantitative easing (QE), i.e buying up government bonds and securities, thereby infusing cash with the banks. This allows banks to have more reserves and ability to lend more at easier rates.

In contrast, “shadow QE” refers to financial-system loosening that achieves similar outcomes to QE but via less transparent or non-traditional channels. The RBI has done just that i.e provided liquidity that maybe termed as “shadow QE”—the expansion of credit capacity through regulatory backdoors.

In the short term, the design is clever: foreign capital outflows are offset by a domestic liquidity cushion. Retail investors, brokers, and corporates get breathing space; IPOs and M&A deals find domestic funding lifelines.

Yet there is an irony. Every rupee borrowed by firms against shares or bonds is a rupee of leveraged exposure. When markets rise, it amplifies gains; when they fall, it magnifies losses. The RBI is betting that improved risk models will prevent margin spirals. History, however, may have warnings as well.

WILL THIS INFLATE A BUBBLE?

Whether this “back-door easing” seeds a bubble depends on three variables: liquidity persistence, leverage concentration, and global shocks.So far, net system liquidity has swung between +₹50,000 crore and –₹1 lakh crore since the framework’s debut (RBI Daily Liquidity Report, Oct 2025) —a far cry from a flood. In effect, currency-support operations have sterilised much of the CRRrelease from earlier months.

But the risk lies in behaviour, not balancesheets. As borrowing limits expand and banks enter deal-finance territory, credit concentration may quietly rebuild. Analysts at Nomura India (Oct 2025) warn that M&A financing “could re-interlink banks and corporates in ways reminiscent of the pre-2013 cycle.”

If a global shock—say, a stronger dollar or another tariff escalation—forces RBI to defend the rupee by selling dollars and draining liquidity, the leverage could unwind abruptly. The resulting margin calls would tighten financial conditions just when the economy needs support.

A CALCULATED TRANSITION TOWARD DOMESTIC DEPTH

Why take the risk? Because India’s policy elite recognises that its capital markets cannot remain hostage to fickle foreign flows. The GST 2.0 revamp, rolled out this summer, is expected to add 0.4 percentage points to FY26 GDP by stimulating consumption and small-business liquidity (Grant Thornton India Review, Sept 2025). But the capital markets needed a different oxygen source—one generated domestically.

By allowing individuals to leverage assets and enabling banks to back corporate combinations, the RBI is pushing India toward financial self-reliance. The bet is that domestic liquidity can offset foreign flight, deepening the local credit market and keeping the growth engine humming.

The RBI insists its strategy is a balancing act: to supply liquidity without inviting speculation. And for now, the system seems stable. The IMF’s World Economic Outlook (Oct 2025) lifted India’s 2025 growth forecast to 6.6% while keeping inflation contained at 3.3%. The rupee has steadied near ₹84 per dollar, and early October saw a flicker of net FPI inflows (NSDL Data Oct 8 2025).

But beneath the calm, risk is accumulating in complex pipes: margin funding, acquisition loans, and security-backed credit. Each is small in isolation; together, they represent a quiet monetary easing. The real test will come when markets face their next global tremor. If the liquidity that entered through the back door rushes out the same way, the tap could run dry before anyone hears it creak.International economics is a tricky turf. So far, the RBI has played the match well.

(Views expressed are the author’s own).

Parneet Sachdev, IRS is the Chairman of Real Estate Regulatory Authority and a leading author.