While the Reserve Bank of India (RBI) has doubled down on liquidity injection measures to help banks tide over liquidity deficit in the run up to the financial year (FY) end, fixed income market experts expect the deficit pressure to spillover into at least the first quarter of FY26, requiring continuation of these measures.
Further, they see the possibility of a cash reserve ratio (CRR) cut in the April 2025 bi-monthly monetary policy.
The experts emphasised that the RBI’s interventions in the forex market are likely to continue so as to contain excessive volatility in the rupee’s movement against the dollar amid global tariff wars set off by the US. This intervention, entailing sale of dollars, leads to sucking out rupee liquidity from the system.
Also, government spending during the “lean” period (first half of FY26) bears watching. Any build up in the government’s balances with RBI will result in liquidity deficit in the banking system.
Though the liquidity deficit has narrowed from about ₹1.60 lakh crore as at February-end 2025 to about ₹54,500 crore as on March 5, 2025, it is expected to widen again due to outflows from the banking system on account of advance tax and GST payments.
Deepak Sood, Partner and Head Fixed Income, Alpha Alternatives, said: “The recent liquidity injection measures should ensure a comfortable liquidity position as we head into the financial year-end. “
“However, I believe, the RBI will need to continue injecting durable liquidity into the system in FY 2025-26, and we should expect more OMOs (open market operation purchase of Government Securities). The Central bank may prefer maintaining a liquidity surplus to facilitate smoother transmission of its monetary policy easing.”
Additionally, if the RBI continues selling dollars to curb excessive volatility in the rupee’s movement against the greenback or if government balances with the RBI see a significant build-up, it could put further strain on systemic liquidity.
Bolstering liquidity: RBI measures
The RBI, on March 5th, announced liquidity injection measures, including open market operation (OMO) purchase of Government Securities (G-Secs) and US dollar/Indian rupee buy/sell swap, aggregating about ₹1.87 lakh crore to alleviate expected liquidity tightness in the banking system in the second half of this month.
These measures were announced on top of a series of measures it took between January 30 and February 28 to infuse liquidity aggregating about ₹2.80 lakh crore.
Sood observed that the first half of the fiscal year is typically a lean season, which means government cash accumulation could necessitate additional liquidity infusions from the RBI.
“The RBI has historically ensured that liquidity remains adequate, whether through core (structural) liquidity injections or short-term tools like LAF (liquidity adjustment facility) and VRR (variable rate repo) auctions.” he said.
Sood opined that one tool the RBI could deploy in its April policy meeting is a further 25 basis poins cut in the Cash Reserve Ratio (CRR). This would inject durable liquidity into the system and provide a boost to banks’ bottom lines.
The RBI last cut the CRR from 4.50 per cent to 4 per cent in December 2024 in two tranches of 25 basis points each.
SBI’s economic research department economists recently assessed that with an unchanged ownership in G-Secs in FY26, the OMO gap in FY26 could still be around ₹1.7 lakh crore. Thus, more liquidity measures could be required on a sustained basis.
They suggested that RBI could look into using CRR more as a regulatory intervention tool / countercyclical liquidity buffer rather than as a liquidity tool in future.
The SBI economists noted that system liquidity situation remained tight and turned to injection mode since December 16, 2024, due to many reasons — tax outflows, forex market intervention and volatility in capital flows.
Further with the implementation of Just in Time (JIT), the system liquidity has been impacted through movements in the government cash balances.
