India's banking system liquidity has fallen into a deficit for the first time in nearly three months, prompting the Reserve Bank of India (RBI) to inject 1.41 trillion through a seven-day variable rate repo (VRR) auction to ease the temporary tightness.
The Indian banking system's net liquidity surplus has reached a four-year high of Rs 4.57 trillion, driven by maturing government securities, with further maturities expected to push the surplus to around 5 trillion.
India's banking system is grappling with a persistent liquidity surplus exceeding Rs 5 trillion, driven by significant government spending and bond redemptions, leading market participants to anticipate the Reserve Bank of India will step up Variable Rate Reserve Repo operations to manage the excess funds.
'India has the potential to grow at more than 7%, with the monetary policy providing a supportive hand.'
Reserve Bank on Friday decided to cut Cash Reserve Ratio (CRR) by a huge 1 per cent, which will unlock Rs 2.5 lakh crore liquidity to the banking system for lending to productive sectors of the economy. With the reduction in four equal tranches ending November 29, 2025, the CRR would come down to 3 per cent.
After effecting two back-to-back 25 basis points rate cuts, Reserve Bank Governor Sanjay Malhotra on Wednesday hinted at another reduction in key policy rate by changing the central bank's monetary stance to 'accomodative' from 'neutral', which may further lower EMIs for consumers.
The liquidity will move into deficit after advance tax payments and GST outflows. It will rebound in October because of government spending.
Liquidity in the banking system has slipped into a deficit for the first time in three weeks, prompting banks to borrow the largest quantum of funds from the Reserve Bank of India (RBI) in around a month and a half. The key catalyst for the sudden tightening in liquidity was due to outflows on account of advance tax payments, which occur towards the end of a quarter. Analysts also cited other factors such as a currency leakage and possible interventions by the RBI in the foreign exchange market, which contributed to the tighter liquidity conditions.
