For the first time in FY26, India’s banking system liquidity slipped into deficit, driven by nearly ₹2.5–3 lakh crore in tax outflows from GST and advance tax payments. The deficit stood at ₹32,000 crore on September 22, compared to a ₹7,000 crore surplus a day earlier. The Reserve Bank of India (RBI) intervened with variable rate repo (VRR) auctions to anchor overnight rates, highlighting its role in managing systemic liquidity. Analysts expect conditions to normalize as government spending, bond maturities, and CRR cuts add funds back into the system.
Core Development
Liquidity pressures pushed overnight money market rates above the policy repo rate of 5.5%. In response, the RBI conducted two VRR auctions of ₹1 lakh crore each, with the first oversubscribed and the second only partially subscribed
The Weighted Average Call Rate (WACR) closed at 5.59%, slightly above repo, while TREPS eased to 5.41%. The next CRR cut on October 4 and the redemption of two government bonds (worth ₹72,000 crore) are expected to inject additional liquidity.
Key Drivers / Issues
Heavy tax outflows from GST and advance taxes.
Liquidity surplus narrowing below RBI’s comfort threshold of 1% of deposits (about ₹2.5 trillion).
RBI interventions through repo auctions to prevent rate spikes.
Anticipated relief from ₹60,000 crore liquidity injection via CRR cuts.
Stakeholder Impact
For banks, temporary funding pressures emerged but borrowing rates stayed manageable. Investors closely tracked bond yields for signs of volatility. Borrowers saw minimal near-term impact, though liquidity shortages can affect lending if prolonged. For the RBI, the episode underlines the need for calibrated liquidity management amid fiscal flows.
Industry & Policy Reactions
V.R.C. Reddy (Karur Vysya Bank): Outflows pressured liquidity, but conditions should normalize as spending picks up.
Treasury officials emphasized the importance of VRR auctions in cooling rates.
Economists expect liquidity to rebound by month-end with government spending resuming.
Challenges Ahead
Managing liquidity swings during tax payment cycles.
Balancing liquidity injections with inflation management.
Ensuring investor confidence amid rupee weakness and bond supply pressures.
Strategic Outlook
The liquidity deficit appears transitory. With government spending and CRR cuts lined up, RBI is likely to restore comfort levels soon. However, recurring cycles of sharp outflows may push policymakers to refine liquidity management frameworks.
Why This Matters
System liquidity is central to credit flow, bond yields, and monetary policy transmission. The RBI’s swift intervention highlights how closely India’s financial stability is tied to managing fiscal outflows and systemic liquidity.
