The liquidity strain that banks are currently experiencing may ease from the second half of April as Government spending is seen kicking in by then even as credit demand typically moderates in the first quarter, per treasury market experts’ assessment.
The banking system has been reeling under liquidity deficit since mid-December 2024, despite the RBI undertaking a slew of liquidity infusion measures. Currently, the deficit is estimated at ₹2 lakh crore, or thereabouts.
Foreign Portfolio Investor (FPI) selling in the Indian capital markets, which is one of the factors weakening the rupee, the RBI’s intervention in the forex market to smoothen excessive volatility of the Indian currency against the dollar, and tepid government spending are among the reasons why liquidity is tight in the banking system, said a senior treasury official of a public sector bank.
The liquidity injection measures that the RBI put in place in the last couple of months include Cash Reserve Ratio (CRR) reduction in December 2024 from 4.50 per cent of banks’ deposits to 4 per cent, as well as a slew of other measures – open market operation (OMO) purchase of Government Securities, conducting longer-term variable rate repo (VRR) auctions and undertaking USD/INR Buy/Sell Swap auctions.
RK Gurumurthy, Treasurer, Karnataka Bank, observed that the banking system has seen continuous liquidity deficit since mid-December 2024.
He opined that festival spending, tax outflows, currency intervention and the resultant liquidity leakage, and FPI/FDI (foreign direct investment) led outflows that translated into liquidity drain aggravated the situation.
“RBI has taken a lot of measures — CRR cut, regular VRR and some of them even straddling March-end, two large tranches of OMOs and now the second currency swap of $10 billion.
“While these clearly suggest a strong intent to arrest the deficit and provide required liquidity support, the imbalance may sustain beyond March-end as the system will yet again get into tax payments mode, which will drain liquidity temporarily,” Gurumurthy said.
He noted that Government spending and slack in credit demand during Q1 (April-June) of FY26 should help correct this liquidity deficit. Rate transmission gets hampered when liquidity is in deficit mode.
Referring to deposit growth lagging credit growth in the banking system, CareEdge Ratings, in a report, said banks have intensified their efforts to enhance their liability franchises by offering higher rates on term deposits.
Additionally, they are sourcing funds through certificates of deposit (CDs), albeit at a higher cost. Furthermore, a liquidity deficit in the banking system has hampered deposit growth.
Citing a RBI report, the agency said the issuance of CDs rose by 43.9 per cent year-on-year, reaching ₹9.57 lakh crore from April to February 2025. This marks a considerable increase compared to ₹6.66 lakh crore in the year ago. This surge reflects banks’ funding requirements.