The liquidity deficit in the banking system fell to Rs 13,000 crore on Thursday, its lowest since December 16. Experts say the worst of the liquidity deficit may be over and expect it to turn surplus in the first quarter. The Reserve Bank of India (RBI) conducted a five-day variable rate repo (VRR) auction with a notified amount of Rs 1 lakh crore on Friday, which received bids worth Rs 38,423 crore only, reflecting low demand for funds from banks.
“Based on our current assumptions, durable liquidity is expected to remain in surplus over next few quarters assuming OMOs (open market operations) of Rs 0.5-1 lakh crore, RBI dividend of approximately Rs 2.5 lakh crore or more, rolling over of maturing forwards position and balance of payment surplus of $5-15 billion in FY26,” Anubhuti Sahay, head, India, economic research, Standard Chartered Bank, said. “RBI’s bold and swift action also assures of more action if needed and thus one can say that worst on liquidity is probably behind us.”
Sahay noted that noted that a key risk to the outlook is if the size of forex intervention turns out to be much larger than liquidity injections via various sources.
Liquidity remained in surplus mode until mid-December last year but began to tighten in the final week of December. The cash squeeze tightened further with deficit breaching Rs 3 lakh crore mark to touch 10-year high in January. Intervention by the RBI to defend the rupee, outflows related to advance tax payments and Goods and Services Tax created shortage of funds in the banking system. With deficit at multi-years high, RBI took series of measures including holding forex swaps and conducting OMO and VRR auctions to inject durable and short term liquidity in the system.
On March 4, liquidity deficit fell to Rs 20,000 crore as per the RBI data.
“As we approach the new financial year, it is likely that there will be a surplus in daily bank liquidity. With monetary policy stance expected to shift in FY26 to a more accommodative view, the extent of deficits we witnessed in FY25 should not get repeated in FY26,” said Debopam Chaudhuri, chief economist, Piramal Enterprises. “Additionally, it would be conducive for the borrowing environment if RBI shifts to a more aggressive rate cut programme, front loading the intended extent of the cuts, to make up for lost time.”
The current confluence of data appears to be in favour of larger cuts, with inflation, domestic liquidity deficit and forex rates cooling down simultaneously, added Chaudhuri.
Since mid-January, the RBI has been injecting funds to counter a sharp decline in liquidity. The apex bank introduced several measures including lowering Cash Reserve Ratio (CRR), daily variable rate repo, long-term repo auction, forex swaps and OMO purchases, to ease liquidity stress.