India’s banking system liquidity is likely to remain under pressure in the near term due to seasonal currency leakages, strong credit demand and the possibility of foreign exchange intervention, though the Reserve Bank of India (RBI) is expected to continue providing support to ease intermittent tightness, ratings agency Icra said in a report on the central bank’s February policy review.
The agency noted that while liquidity conditions have been more comfortable in the current fiscal year compared with FY2025, the monthly average systemic liquidity surplus halved to Rs. 0.7 trillion, or 0.3 per cent of net time and demand liabilities, during December-January FY2026 from Rs. 1.4 trillion, or 0.6 per cent, in October-November FY2026.
This tightening was driven by advance tax-related outflows, higher currency leakage and a rise in the credit-deposit ratio of scheduled commercial banks to 82 per cent in mid-January 2026 from 80 per cent at end-November 2025, the report said.
Currency in circulation increased by Rs. 1.1 trillion between November 28, 2025 and January 15, 2026, significantly higher than the Rs. 688 billion rise seen in the preceding two months, underscoring the seasonal drain on banking system liquidity.
“Icra expects liquidity to remain under pressure in the near term, owing to seasonal currency leakages emanating from rural farm cash demand post rabi procurement, wedding season demand as well as potential forex intervention, and the busy season for credit,” the agency said.
Nevertheless, the central bank is likely to continue deploying liquidity tools such as open market operations (OMOs), variable rate repos (VRRs) and swaps, if required, to ensure monetary transmission and address episodic tight conditions, Icra added.
The RBI has already undertaken a series of measures to inject funds into the system. Since December 2025, it has infused Rs. 14.8 trillion through 27 VRRs and about Rs. 6.4 trillion via OMOs and swaps, while three buy/sell forex swaps alone injected roughly USD 25.1 billion, or around Rs. 2.2 trillion, into the banking system.
Durable liquidity rose to Rs. 3.4 trillion, or 1.4 per cent of NDTL, as of January 15, 2026 from Rs. 2.6 trillion in late November, aided by the final tranche of the cash reserve ratio cut and other liquidity injection tools, although it remained below the Rs. 5.2 trillion recorded in September 2025.
Short-term money market indicators also reflect the tighter environment. The weighted average call money rate edged up to 5.38 per cent in January 2026, exceeding the repo rate by 13 basis points, while rates on commercial papers and certificates of deposit hardened amid moderation in surplus liquidity and year-end seasonal factors.
Despite these pressures, the RBI has reiterated that it will remain proactive in liquidity management, ensuring sufficient funds in the banking system to meet the productive requirements of the economy and facilitate policy transmission.
The liquidity outlook comes against the backdrop of the Monetary Policy Committee’s decision to unanimously keep the policy repo rate unchanged at 5.25 per cent in February 2026 while maintaining a neutral stance, with one member dissenting in favour of an accommodative approach.
Icra expects a prolonged pause in policy rates unless upcoming revisions to the GDP and consumer price index series reveal materially softer growth and inflation trends.
The committee has already raised its CPI inflation projection for FY2026 marginally to 2.1 per cent from 2.0 per cent, partly reflecting higher precious metal prices, while noting that underlying inflation pressures remain muted.
On growth, the National Statistical Office has estimated GDP expansion at 7.4 per cent for FY2026, supported by stronger government consumption, investment and exports, although agricultural growth is expected to moderate.
Looking ahead, the central bank has indicated that liquidity management will be pre-emptive, allowing for fluctuations in government cash balances, currency in circulation and forex operations — a stance that aligns with Icra’s expectation of continued support even as near-term pressures persist. |
