**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 the situation to improve in the coming days. Recent tax outflows have significantly reduced the liquidity surplus to its lowest level since the end of March. However, government spending and bond redemptions are anticipated to counterbalance this effect. Additionally, a phased reduction in the Cash Reserve Ratio (CRR) starting in October is set to support the recovery.
**Tax Outflows Impact Liquidity Surplus**
On September 21, the liquidity surplus in India’s banking system fell sharply to ₹70 billion (approximately $794 million), marking its lowest point since March-end. This decline was primarily driven by outflows of nearly ₹2.6 trillion due to income tax and Goods and Services Tax (GST) payments.
The liquidity available in the banking system plays a crucial role in determining market interest rates, including those on consumer loans. Vivek Kumar, an economist at Quanteco Research, noted that this shortage is expected to be temporary. He highlighted that increased government spending in the coming week should help neutralize the impact of the tax payments.
**Reserve Bank of India’s Perspective**
The Reserve Bank of India (RBI) considers a liquidity surplus equivalent to about 1% of banks’ deposits — roughly ₹2.5 trillion — as comfortable. In recent weeks prior to the tax-related outflows, liquidity levels had averaged above this threshold.
Gaura Sengupta, Chief Economist at IDFC First Bank, forecasts that liquidity will rise again over the next few weeks, supported by accelerating government expenditure and a planned lowering of banks’ CRR.
**Upcoming CRR Adjustments**
The CRR is the portion of funds that banks are required to park with the RBI. Starting October, the RBI will reduce the CRR by a total of 100 basis points in four equal installments spanning from September to November. The next cut is scheduled to take effect on October 4.
Economist Vivek Kumar expects the liquidity surplus to rebound to between ₹2 trillion and ₹2.5 trillion before this date, helping stabilize the banking system’s liquidity position.
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In summary, while India’s banking system is currently facing a liquidity crunch due to significant tax outflows, upcoming government spending, bond redemptions, and scheduled CRR cuts are poised to restore liquidity levels in the near term.
https://www.newsbytesapp.com/news/business/temporary-liquidity-crunch-in-india-s-banking-system-right-now/story
