Context:
India’s banking system has witnessed a sharp turnaround in liquidity—from a deficit of ₹2 trillion at end-2024 to a surplus exceeding ₹3–4 trillion daily in mid-2025. This shift poses both opportunities and risks, prompting a call for greater transparency and active liquidity management by the RBI.
Key Developments
From Deficit to Surplus
- 2024-end: Liquidity deficit (~â‚ą2 trillion) due to RBI’s currency market intervention to support the rupee.
- Mid-2025: Liquidity surplus (~₹3–4 trillion daily) due to:
- Reduced forex market pressure
- Favourable inflation outlook
- RBI injecting â‚ą9.5 trillion durable liquidity since Jan 2025
- CRR cut of 100 bps (in four tranches) expected to release â‚ą2.5 trillion
Implications of Excess Liquidity
| Positive Effects | Potential Risks |
|---|---|
| Easier credit transmission | Inflationary pressures, particularly in asset prices |
| Lower borrowing costs | Depressed savings rates, prompting shift to riskier assets |
| Boost to investment and consumption | Misallocation of credit to unqualified borrowers |
| Temporary support to government borrowing | Erosion of bank margins due to cheaper corporate bond financing |
Emerging Trends
- Deposit Rate Cuts: Banks, flush with funds, are reducing savings deposit rates.
- Cheap Loans: Reports indicate loans as low as 6.1% interest, barely above the cost of funds.
- Capital Market Preference: Corporates are shifting to capital markets, with:
- â‚ą10 trillion corporate bond issuance in FY25
- 60% of fresh capital raised through debt
- Compressed Bank Margins: Capital market competition limits banks’ pricing power.
Monetary Policy Challenges
- Weighted Average Call Rate (WACR) is below the policy repo rate, indicating excess liquidity.
- RBI is using Variable Rate Reverse Repo (VRRR) auctions to absorb funds but may need stronger tools.
- Lack of explicit communication on liquidity targets causes uncertainty among market participants.
Recommendations for the RBI
- Communicate desired liquidity band: Clarity on target surplus levels can anchor market expectations.
- Enhance VRRR operations: Scale and frequency may need adjustment.
- Monitor credit quality closely: Ensure easy liquidity doesn’t fuel bad lending.
- Coordinate with fiscal authorities: To avoid excess overlap of CRR-induced liquidity and government borrowing plans.
