As of 23 October, liquidity in the banking system was in a deficit of ₹2,645 crore. Market participants warn that if the outflows persist, core liquidity—system liquidity after accounting for government cash balances—could slip below 1% of the net demand and time liabilities (NDTL) by the March quarter. This will tighten funding conditions, push up short-term rates and strain banks’ ability to lend during the busy season.
Under its liquidity management framework, the RBI aims to maintain system liquidity, which includes government cash balances, at around 1% of NDTL.
RBI’s actions are needed as benefits from the cut in cash reserve ratio (CRR)—the percentage of a bank’s total deposits that must be kept with the RBI in cash—earlier this year, with two tranches of ₹62,500 crore each released already, have largely been offset by heavy outflows of rupee liquidity.
“Even after assuming no further drain from forex intervention in the remainder of FY26, there could be a need for durable liquidity infusion at the end of Q3 FY26,” said Gaura Sen Gupta, chief economist at IDFC First Bank. Core liquidity is estimated to drop to below 1% of NDTL in the March quarter, which implies that system liquidity would be even lower, given a positive government cash surplus, added Sengupta.
Open market operation purchases happen when a central bank buys government bonds from banks and, in turn, injects money into the banking system.
“With frictional liquidity already in deficit and durable liquidity declining by nearly ₹1 trillion, the central bank may soon resort to durable liquidity measures, most likely through OMO purchases, possibly starting as early as December,” V. Ramachandra Reddy, treasury head, Karur Vysya Bank, said.
FX intervention offsets CRR benefits
In June, the central bank had announced a phased 100-basis-point CRR cut to 3% from September to November, which would release about ₹2.5 trillion worth of liquidity in the banking system.
Despite these efforts, liquidity has been in deficit for three consecutive days from 20-22 October. The last time liquidity was in deficit was on 24 September, according to data by Bloomberg, on the back of quarterly advance tax outflows.
Core liquidity has dropped from ₹6 trillion on 23 May to ₹3.45 trillion as of 17 October, Sengupta said. She said the bulk of this decline so far in the current fiscal year has come from FX interventions, both in spot and forward markets.
The rupee’s defence around the 89-per-dollar level and a widening trade deficit led to sizable dollar sales by the RBI. These operations have absorbed more liquidity than what the CRR cut infused. Approximately, ₹1.5 trillion was drained through FX interventions from 26 September to 17 October, according to reserve money data by RBI.
Since the government usually runs a cash surplus of ₹2–3 trillion parked with the RBI, system liquidity is typically lower than core liquidity.
The ongoing festive season has led to further tightening of liquidity due to increased currency leakage, as cash withdrawals rise to meet rural and consumption demand.
Almost ₹60,000 crore was drained due to FX intervention and ₹20,000 crore through currency leakage in the 10-17 October week, RBI data showed.
“Overall, I don’t think liquidity conditions will improve as much. However, if a rate cut comes in December, I expect that RBI will move to a more neutral liquidity scenario, where core surplus will be close to ₹2-3 trillion and overall headline system liquidity will be close to zero. So, we will probably come down to that kind of scenario,” Shailendra Jhingan, head of treasury at ICICI Bank said.
The RBI also faces forward dollar delivery obligations of about $20 billion through December, which could continue draining rupee liquidity as the central bank unwinds its earlier buy-sell swaps.
Traders also believe that the 10-year benchmark government bond yield has stubbornly stayed around 6.50% level in recent weeks, reflecting tight liquidity, rather than any change in policy expectations.
“Market expects RBI to step in with formal or behind-the-screen OMOs to stabilize liquidity and yields. This is a frictional drawdown that might reverse, but OMOs remain the best solution to anchor yields and support banks facing mark-to-market losses.” another senior treasury official said.
While the RBI has been using variable rate repo and reverse repo operations to manage short-term mismatches, market participants believe these measures may not be sufficient if core liquidity continues its downward trajectory.
