Liquidity surplus narrows despite fund infusion post-first 25 bps CRR cut

Reserve Bank of India

The surplus liquidity in India's banking system has narrowed despite the infusion of the funds from the first tranche of Cash Reserve Ratio (CRR) cut. Experts attribute this to the higher currency in circulation and a mild pick-up in credit demand ahead of the festive season.

According to Reserve Bank of India’s (RBI) data, the net liquidity surplus has declined from Rs 2.87 lakh crore on Friday last ween (September 5) to Rs 2.36 lakh crore on Monday this week (September 8), a drop of over Rs 50,000 crore in just three days.

The CRR cut, announced in June monetary policy by the RBI, was expected to inject around Rs 60,000-70,000 crore via first tranche into the banking system, offering relief to banks and ensuring smoother credit flows.

The CRR cut was scheduled in four tranches of 25 bps each starting from the fortnight beginning September 6, followed by October 4, November 1 and November 29, 2025.

The timing of the CRR cut is crucial because between September and November, India witnesses a festive season due to which currency leakage from the banking system increases, thereby putting a pressure on systemic liquidity. The CRR cut will provide a durable liquidity support of Rs 2.5 lakh crore to the banking system during festive season.

“Rise in currency in circulation affects liquidity. Consumer credit and cash demand as reflected in CIC numbers seem to be the probable reason for reduction in net liquidity,” said Mataprasad Pandey, vice-president at Arete Capital Service.

Further,  Sovereign Global Markets managing director Umesh Kumar Tulsyan said tax outflows eroding bank deposits and migrating to government accounts and increase in cash withdrawals for upcoming festive seasons. "Additionally, RBI has been conducting VRRRs on continuous basis including today for Rs 50,000 crore which has received a muted response at 40 percent offers being accepted, possibly due to the same undergoing situation."

Spike in currency demand, in particular, plays a crucial part. With the festive season approaching, which started with Ganesh Chaturthi towards the end of last month, followed by Navratri, Durga Puja, and Diwali, there is typically a sharp increase in cash withdrawals by households and businesses. As people prefer holding more cash for spending during festivals, this pulls money out of the banking system and reduces overall liquidity.

The CIC has already risen by 2.1 percent so far in the current financial year. CIC is expected to rise significantly in the coming months on back of festive season transactions, Bihar state election in November and the recent reduction in Goods and Services Tax (GST).

Further, a recent uptick in the credit growth also led to slight decline in banking system liquidity experts said.

The systemic credit growth of Indian banking system stood at 10.03 percent on-year in the fortnight ended August 22, signalling that banks are ramping up credit ahead of the festival season, amid rate cuts and expected consumption boost following GST regime overhaul.

This is the third consecutive fortnight that credit growth has stayed in double digits. According to RBI data, credit growth was at 10.22 percent in the fortnight ended August 8 and 10.03 percent as on July 25.

While the RBI’s CRR cut was aimed at easing liquidity to support economic activity, the current tightening may require further monitoring, experts said.

Given the seasonal trends and continued credit growth, experts expect liquidity conditions to remain under pressure through September. The upcoming festival months could see further strain, especially if credit demand continues to rise and currency withdrawals increase, but the CRR cuts fund infusion may give some cushion to the banking system liquidity.