The Reserve Bank of India (RBI) may need to infuse an additional ₹1 lakh crore into the banking system by March to maintain liquidity at a stable level, according to a recent report by the State Bank of India (SBI) research team. The report highlights worsening liquidity conditions in the banking system, which have reached one of the most severe shortages in over a decade.
Severe Liquidity Deficit in the Banking System
According to the SBI report, the banking system is currently facing a liquidity deficit of around ₹1.6 lakh crore as of the end of February. The average liquidity shortfall is even higher, standing at approximately ₹1.95 lakh crore.
Liquidity conditions have deteriorated significantly over the past few months. In November 2023, the system had a surplus liquidity of ₹1.35 lakh crore. However, by December, this had turned into a deficit of ₹65,000 crore, which further expanded to ₹2.07 lakh crore in January 2024 and stood at ₹1.59 lakh crore in February.
The primary reasons behind this liquidity squeeze include:
- Foreign Portfolio Investor (FPI) Outflows – Significant withdrawals by FPIs have contributed to liquidity stress.
- Maturing Forward Transactions – The maturity of forward deals within 1 to 3 months has added to the liquidity pressure.
- Rising Credit Demand – Increased lending activities have led to a higher demand for liquidity.
- Year-End Tax Outflows – Fiscal obligations have further strained the system.
RBI’s Measures to Ease Liquidity Pressure
To manage the liquidity crunch, the RBI has taken several steps, including:
- Variable Rate Repo (VRR) Auctions – The central bank has been conducting daily VRR auctions since January 16 to address short-term liquidity needs.
- Open Market Operations (OMOs) – The RBI has conducted OMOs worth ₹1.38 lakh crore to inject funds into the system.
- Dollar-Rupee Swap Arrangements – These measures help stabilize foreign exchange reserves and influence liquidity conditions.
- Repo Rate Cut – In February 2025, the RBI reduced the repo rate by 25 basis points to support liquidity.
Quarter-end VRR auctions scheduled for April are expected to inject ₹1.8 lakh crore into the system. However, despite these interventions, liquidity remains tight. The RBI’s daily VRR data reveals that, on average, 83% of bids received have been allotted since December 17, 2024.
Will RBI Inject ₹1 Lakh Crore More?
Given the sustained liquidity deficit, the SBI report suggests that the RBI will need to infuse an additional ₹1 lakh crore into the banking system by March. This is necessary to ensure that liquidity reaches an equilibrium level.
If liquidity conditions continue to remain tight, the RBI may have to take further steps to stabilize the banking system, including more OMOs, additional repo rate adjustments, or increased VRR auctions.
India’s banking system is currently under significant liquidity stress, driven by multiple factors such as FPI outflows, rising credit demand, and year-end tax payments. Despite the RBI’s efforts through repo rate cuts, VRR auctions, and OMOs, the liquidity deficit remains high.
According to the SBI report, an additional ₹1 lakh crore injection may be necessary by March to stabilize liquidity. The coming weeks will be crucial in determining whether the RBI takes further action to address the liquidity crisis.
