How Is the RBI Managing the Liquidity Deficit in India’s Banking Sector?

As per a report by the State Bank of India, ₹1.6 lakh crore worth of systemic liquidity deficit was observed in the Indian economy, with an average liquidity deficit estimated at ₹1.95 lakh crore at the end of February.

This situation is a sharp downturn from the liquidity surplus observed by the banking industry in November 2023 (₹1.35 lakh crore), which quickly plummeted to ₹65,000 crore in the next month and amounted to ₹2.07 lakh crore by January 2024.

Major FPI Outflows

As per the National Securities Depository Limited, foreign portfolio investors withdrew nearly ₹ 1 lakh crore during January-February 2025. This was attributed to the comeback of President Donald Trump in the US elections and the increasing appeal of US bond yields among investors.

In February 2025, foreign portfolio investors offloaded ₹ 23,710 crore worth of equities in the stock market. In 2024, India recorded a y-o-y decline of 99% in net investments, thereby creating a significant liquidity deficit.

Sustained Growth in Credit Demand 

As per a report by HSBC Securities and Capital Markets, Indian banks are expected to witness a 12.5% year-on-year growth in credit demand during FY 2025-26. This can be attributed to the increasing demand for retail loans, non-food credit, gold loans, and corporate loans, among others.

Based on industrial analyses, the demand for non-food credit and retail loans recorded a year-on-year growth of 12.2% and 13.3% respectively in November 2024. MSME lending also grew by 13.8% year-on-year, while corporate lending increased by 9.6%. This highlights that the burgeoning demand for credit is outpacing existing systemic liquidity, thereby creating problems.

Measures Taken

To curb this situation, RBI has taken the following steps:

1. RBI has carried out Open Market Operations worth ₹1.38 lakh crore. By purchasing government securities, the RBI aims to improve the liquidity crunch within the banking industry by fuelling it with more money.
2. The RBI has organised Variable Repo Rate (VRR) auctions to enable banks to meet their short-term liquidity needs by lending them at affordable interest rates.
3. It has reduced the repo rate by 25 basis points to make borrowing even cheaper for banks, thereby improving their liquidity position.
4. The RBI has also made USD-INR swapping arrangements to manage fluctuations in the exchange rate and improve the overall economic situation.

Conclusion

Despite these measures, SBI research suggests that the RBI should inject ₹1 lakh crore by March into the Indian economy to tackle the challenges posed by the liquidity crunch. Moreover, if the situation continues, the bank may have to take more serious measures in the coming future.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.