Reserve Bank of India (RBI) data and market participants suggest that India's banking liquidity surplus fell to its lowest level in FY27, mainly on the back of advance tax payments by corporates. Nevertheless, the liquidity conditions are likely to improve markedly in the next quarters, given the central bank's efforts to boost liquidity.
The banking system's surplus liquidity dropped significantly to Rs 23,881 crore from Rs 1.5 trillion on Monday, the lowest since March 26, 2026. The decrease is due to significant withdrawals from the banking system in advance of regulatory requirements by businesses making advance tax payments.
Key Highlights
- Banking liquidity surplus plunged to Rs 23,881 crore due to advance tax payments.
- RBI measures may inject Rs 4.5 trillion liquidity by Q2, supporting money markets.
Advance Tax Payments Trigger Liquidity Tightening
Economists attributed the sudden contraction in liquidity largely to tax-related fund outflows. “There was advanced tax outflow which led to the decline in liquidity,” said Gaura Sen Gupta, Economist at IDFC First Bank.
When advance tax payments are made, money is withdrawn from the banking system with the money paid out from commercial bank accounts going to the government accounts, which decreases the amount of money in circulation for lending and interbank transactions.
This new liquidity squeeze follows almost three months of ample liquidity, with the amount of money consistently exceeding Rs 1 trillion, owing to the RBI interventions and government expenditure.
Money Market Rates Remain Stable
Despite the sharp decline in liquidity, short-term money market rates remained largely stable. Weighted Average Call Rate (WACR) held steady at 5.35%, marginally down from 5.36% in the previous session - the operating target of the monetary policy framework of the RBI.
The WACR was also at 5.25% in the prior week, near the policy repo rate, indicating plenty of liquidity in banking system.
The liquidity environment was "tightening" temporarily, but overall it is "manageable" and is yet to cause "stress" in money markets, said market participants.
Also Read: RBI Issues Final Mis-Selling Rules for Banks and NBFCs: Check Details
RBI Measures Expected to Boost Liquidity
Analysts continue to be positive about the liquidity conditions and believe that they will improve significantly in the next few months, which can be attributed to the RBI's policy measures to back credit growth and keep liquidity in the financial system adequate.
Market estimates indicate that cumulative liquidity infusion could reach Rs 4.5 trillion by the end of Second Quarter of FY27, which will provide ample liquidity cushion to banks.
“Expect strong inflow in the banking system in the second quarter and the market estimate is Rs 4.5 trillion. This will keep the money market rates down which rose earlier,” said a money market dealer at a state-owned bank.
The anticipated rise in liquidity should help stimulate lending, lower funding costs for banks and help to maintain short-term borrowing rates.
RBI May Use VRR Auctions During Temporary Stress
The market also suggested the RBI may have to go for more of the Variable Rate Repo (VRR) auctions if short-term liquidity problems arise.
The VRR auction enables banks to borrow funds from the central bank on a short-term basis, thereby reducing the impact of liquidity fluctuations which may result from seasonality effects like tax payments, government cash balances, and major financial markets settlements.
The latest liquidity deficit comes from the advance tax collections, but economists are confident that the liquidity situation is on a positive trajectory as the RBI has taken steps to improve it and there are more inflows on the horizon in the coming months.
