Banks' liquidity shortfall eases sharply to around Rs 20,000 crore, lowest since going into deficit in December

Reserve Bank of India

The liquidity deficit in the banking system eased sharply to Rs 20,416.70 crore as on March 4, from Rs 1.1 lakh crore on March 3, according to the Reserve Bank of India’s (RBI) data, which experts are attributing to inflows from USD/INR Buy/Sell swap auctions, for which the first leg of settlement took place on March 4.

“The liquidity deficit has decreased from Rs 1.01 lakh crore (March 3) to Rs 20,417 crore (March 4), a reduction of approximately Rs 89,000 crore. This amount is closer to the liquidity expected to be received on the settlement day (March 4) of 3-year USD/INR Swap auction held on February 28,” Mataprasad Pandey, Vice President of Arete Capital Service said.

This is the lowest level of the liquidity shortfall since turning into deficit in December 2024. Economists had pegged the auction to provide around Rs 85,000-88,000 crore worth of liquidity into the banking system.

The central bank had conducted the 3-year $10 billion buy/sell swap in February 2025, and the first leg of settlement took place on March 3. This was the second swap auction by the central bank after it infused $5.1 billion through a six-month swap on January 31.

The central bank's USD/INR Buy/Sell swap auction for a longer tenure provides durable liquidity to the banking system, unlike that provided through daily VRR auctions. The daily Variable Repo Rate (VRR) auction by RBI helps banks borrow funds at market-determined rates to cater to short-term liquidity requirements and releases liquidity stress.

A Kotak Mahindra Bank report dated March 3 had said that going into this week (March 1 to March 7), the banking system liquidity deficit is expected to continue to ease, as the pace of government spending remains steady, and also due to the impact of the 3-year $10 billion buy/sell swap announced by RBI.

Liquidity in the banking system has been under stress since November 2024 due to tax outflows, heavy selling by foreign portfolio investors in Indian equities and the consequent intervention by the RBI in the forex market to sell dollars, along with lower-than-anticipated government spending.

To support the liquidity in the banking system, the RBI has since late-2024 infused around Rs 3 lakh crore worth of durable liquidity, tapping a combination of VRR auctions, swaps and open market operations.