RBI may need to infuse ₹1 lakh crore by March-end to ease liquidity crunch: SBI Research

The Reserve Bank of India (RBI) may need to inject an additional ₹1 lakh crore into the financial system by the end of March to maintain liquidity equilibrium, according to a report by SBI Research.

The report commended the RBI’s proactive measures in managing liquidity but underscored that a delicate mix of temporary and permanent liquidity infusion is still a work in progress. It highlighted that despite the central bank’s efforts, systemic liquidity remains constrained due to tax outflows, capital market volatility, and forex interventions.

Liquidity crunch amid Forex interventions

Since mid-December 2024, systemic liquidity has shifted to deficit mode due to multiple factors, including forex market interventions to counter volatility in capital flows, tax outflows, and the government’s transition to the Just-In-Time (JIT) SPARSH system, the report noted.

The liquidity deficit worsened from ₹65,000 crore in December to ₹2.07 lakh crore in January before easing slightly to ₹1.59 lakh crore in February. Despite some improvement in March, SBI Research warned that liquidity pressures persist due to year-end tax outflows and increased credit demand.

RBI’s response: VRR auctions, OMOs, and FX swaps

To address the liquidity shortage, the RBI has deployed various tools, including multiple variable rate repo (VRR) auctions since January 16, unrestricted open market operations (OMOs), and a 25 basis points repo rate cut. A mega $10 billion forex swap was conducted to inject durable liquidity into the system.

“RBI’s recent swap of US$ 10 billion (largest so far) has calmed the market participants’ frayed nerves, indicating the Central Bank is willing to walk the extra mile to restore sanity, infusing long term liquidity, while keeping the cost dynamics in mind,” it said.

SBI Research noted that while VRR auctions are helping in short-term liquidity management, they are also acting as a substitute for long-term liquidity injections.

Despite the liquidity measures, bond markets continue to show stress. Corporate bond yields and certificate of deposit (CD) rates have remained elevated, with the spread between the repo rate and corporate bond yields widening to 125 basis points.

Similarly, the spread between the repo rate and 3-month CDs has surged to 119 basis points in February 2025 from negative levels seen in FY21.

The report also pointed out that the spread between state government securities (SGS) and G-secs has widened from 30-35 basis points to 45-50 basis points despite rate cuts. SBI Research suggested that additional OMOs targeting SGSs may be required to harmonise these spreads and improve monetary policy transmission.

“We are of the opinion that there is a need to address this ‘spread widening’ and believe that open market operations may be considered in SGSs as well to smoothen/harmonize the spreads,” it said.

FII outflows weighing on liquidity

Foreign institutional investors (FIIs) have been pulling out funds at an accelerated pace, exacerbating the liquidity crunch. Net FII outflows from Indian equities stood at ₹34,574 crore in February, pushing total outflows to ₹1.12 lakh crore in the first two months of 2025.

Over the five-month period from October 2024 to February 2025, FIIs have withdrawn ₹2.12 lakh crore, despite strong domestic institutional investor (DII) support of ₹3.3 lakh crore.

While Indian equities had been outperforming global peers, valuation concerns and portfolio reshuffling by global wealth managers have led to FII outflows, the report noted.

“Reshuffling of portfolios by Global wealth managers ensured money flows to relatively cheaper jurisdictions though the democratic demographics and renewed growth/earnings prospects should ensure long term money to return and chase value stocks sooner that have well protected economic moats,” it said.

However, strong DII participation has helped contain volatility.

CRR cut may be required for sustained liquidity support

SBI Research suggested that the RBI could consider adjusting the Cash Reserve Ratio (CRR) as a regulatory tool rather than as a primary liquidity instrument. With an unchanged G-sec ownership structure in FY26, the OMO gap could hover around ₹1.7 lakh crore, necessitating additional liquidity measures on a sustained basis.

“RBI could look into using CRR more as a regulatory intervention tool / countercyclical liquidity buffer rather than as a liquidity tool in future,” it said.

The report also highlighted that systemic cash leakage has occurred due to large-scale retail withdrawals linked to the Mahakumbh event, further straining deposit accretion.

“In Mahakumbh, the withdrawal has been largely by retail depositors whereas the accretion of fresh deposits has been with non retail participants and hence a significant part of the money may not come back to systemic deposits,” the report added.