Despite the Reserve Bank of India’s (RBI) recent measures to infuse durable liquidity through a cash reserve ratio (CRR) cut and the maturity of government securities, overall banking system liquidity has remained at a moderate surplus.
The liquidity boost was offset by the central bank’s foreign exchange (FX) interventions, tax-related outflows, a surge in currency in circulation (CIC) during the festive period, and an increase in credit growth across banks.
The CRR cut, announced in the June monetary policy review, was implemented in three phases, on September 6, October 4, and November 1, injecting roughly Rs 1.8 lakh crore into the banking system. However, the intended liquidity cushion has been diluted due to factors draining liquidity from the system.
RBI’s FX interventions have intensified in recent weeks as the rupee depreciated amid global headwinds, including the imposition of tariffs by the United States on Indian goods, and continued foreign portfolio outflows from domestic equities. To curb excessive volatility, the central bank has been selling dollars through banks in the spot market, an action that simultaneously absorbs rupee liquidity from the banking system, tightening overall conditions.
At the same time, the onset of the festive season has fuelled a rise in bank credit growth, further straining liquidity.
The government’s recent goods and services tax (GST) rate cuts have also spurred demand, particularly in consumer-facing sectors. RBI data shows that bank credit growth rose from 10.2 percent, as of September 5, to 10.3 percent on September 19, and further to 11.3 percent each on October 3 and October 17.
Bankers attribute the acceleration in credit demand to be largely driven by festive spending and the GST rate reductions.
CIC has also risen sharply ahead of the festive period and the Bihar elections, adding to the liquidity squeeze. According to RBI data, CIC grew 7.7 percent year on year (YoY) in November, compared with 6.1 percent a year earlier.
Further, statutory outflows on account of GST and advance tax payments have compounded the liquidity stress. These periodic fiscal outflows typically lead to short-term tightening in banking system liquidity, especially when coinciding with festive and election-related cash demand.
Even though these factors have reduced systemic liquidity, it still remained in a surplus of around Rs 2.11 lakh crore. With such abundant liquidity, money market rates remained on the lower side of the curve.
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