Liquidity boost? RBI likely to pump Rs 1 lakh crore into economy by March

The report highlighted that systemic liquidity remains tight, with a deficit of approximately Rs 1.6 lakh crore as of the end of February. The average liquidity deficit is higher, at around Rs 1.95 lakh crore.

The Reserve Bank of India (RBI) may have to inject additional Rs 1 lakh crore into the banking system by March to maintain liquidity at an equilibrium level, according to a report by the State Bank of India (SBI) research.

The report highlighted that systemic liquidity remains tight, with a deficit of approximately Rs 1.6 lakh crore as of the end of February. The average liquidity deficit is higher, at around Rs 1.95 lakh crore.

The banking system has been facing a severe liquidity crunch in recent months, making it one of the worst liquidity shortages in over a decade. It said "We believe around Rs 1 trillion more will be needed by March still to keep the systemic liquidity just in equilibrium..... Daily FPI outflows of significant amount and the maturing of forward transactions within 1/2/3 month and hence the RBI will need to infuse further liquidity."

Liquidity conditions in the banking system have deteriorated significantly over the past few months. In November 2023, the system had a surplus liquidity of Rs 1.35 lakh crore.

However, this quickly turned into a deficit of Rs 65,000 crore in December, which further widened to Rs 2.07 lakh crore in January 2024 and Rs 1.59 lakh crore in February. Several factors have contributed to this situation, including significant foreign portfolio investor (FPI) outflows and the maturing of forward transactions over the next few months.

The report also noted that year-end tax outflows and rising credit demand will likely keep liquidity conditions tight. To ease liquidity pressures, the RBI has taken several measures, including conducting variable rate repo (VRR) auctions of different tenors, open market operations (OMOs), and dollar-rupee swap arrangements.

The central bank has also carried out daily VRR auctions since January 16 to manage short-term liquidity needs. So far, the RBI has conducted OMOs worth Rs 1.38 lakh crore, while quarter-end VRR auctions scheduled for April amount to nearly Rs 1.8 lakh crore. Additionally, the central bank has reduced the repo rate by 25 basis points in February 2025 to support liquidity.

The SBI report indicates that despite these efforts, liquidity remains tight. The RBI's daily VRR data shows that the allotted amount as a percentage of bids received has averaged 83 per cent since December 17, 2024.

While the daily liquidity deficit has slightly reduced in March, the overall situation remains concerning due to sustained credit demand and fiscal outflows. Given these factors, the report estimates that the RBI will need to inject around Rs 1 lakh crore by the end of March to bring liquidity to a balanced level. If liquidity conditions remain tight, the central bank may have to take further measures to stabilize the banking system.