**Why India’s Banking System is Facing a Liquidity Crunch**
*By Dwaipayan Roy | Sep 22, 2025, 07:11 PM*
India’s banking system is currently experiencing a temporary liquidity shortage, but experts expect conditions to improve in the coming days. Recent tax outflows have pushed the liquidity surplus down to its lowest level since the end of March. However, analysts believe that increased government spending and upcoming bond redemptions will help offset this decline. Additionally, a phased reduction in the Cash Reserve Ratio (CRR) starting October will support liquidity recovery.
### Tax Effects on Liquidity
The liquidity surplus in the banking system fell sharply to ₹70 billion (approximately $794 million) on September 21, marking the lowest point since March-end. This decline followed the exit of nearly ₹2.6 trillion due to income tax and Goods and Services Tax (GST) payments.
The amount of cash available in the banking system directly influences market interest rates, including those for consumer loans. Vivek Kumar, an economist at Quanteco Research, noted that this liquidity shortage is likely temporary. He pointed out that increased government spending is expected to neutralize the impact over the coming week.
### RBI’s Perspective on Liquidity
The Reserve Bank of India (RBI) has indicated comfort with maintaining a liquidity surplus of about 1% of banks’ deposits, which translates to roughly ₹2.5 trillion. In recent weeks before the tax-related outflows, the liquidity surplus had consistently remained above this level.
Gaura Sengupta, Chief Economist at IDFC First Bank, predicts that liquidity will rise again over the next few weeks as government expenditure picks up and the CRR is gradually lowered.
### Upcoming CRR Adjustments
The CRR—the mandatory amount banks must hold with the RBI—is set to be reduced by a total of 100 basis points in four equal installments from September through November. The next CRR cut is scheduled to take effect on October 4.
Vivek Kumar expects the liquidity surplus to rebound to between ₹2 trillion and ₹2.5 trillion before this date.
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**In summary, while India’s banking system is facing a short-term liquidity crunch due to tax outflows, supportive measures such as increased government spending and phased CRR reductions are expected to restore adequate liquidity soon.**
https://www.newsbytesapp.com/news/business/temporary-liquidity-crunch-in-india-s-banking-system-right-now/story
