**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 pushed the liquidity surplus to its lowest level since the end of March. However, government spending and upcoming bond redemptions are expected to counterbalance this effect. Additionally, a phased reduction in the cash reserve ratio (CRR) starting in October will support recovery efforts.
**Tax Outflows Impact Liquidity Surplus**
On September 21, the liquidity surplus fell sharply to 70 billion rupees (approximately $794 million), marking the lowest point since March-end. This decline follows significant outflows totaling around 2.6 trillion rupees due to income tax and GST payments. The amount of cash available in the banking system plays a crucial role in determining market interest rates, including those for consumer loans.
Vivek Kumar, an economist at Quanteco Research, noted that this shortage is likely temporary. He believes that increased government spending in the upcoming weeks should help neutralize the liquidity impact.
**Reserve Bank of India’s Perspective**
The Reserve Bank of India (RBI) remains comfortable with a liquidity surplus around 1% of banks’ deposits, which equates to roughly 2.5 trillion rupees. In recent weeks, the liquidity surplus had consistently averaged above this level before the tax-driven outflows.
Gaura Sengupta, Chief Economist at IDFC First Bank, anticipates liquidity to rise again over the next few weeks as government expenditure picks up and banks benefit from a scheduled CRR reduction.
**Phased Reduction in Cash Reserve Ratio**
The CRR—the portion of deposits banks are required to hold with the RBI—will be gradually lowered 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.
According to Vivek Kumar, the liquidity surplus is expected to climb back to between 2 trillion and 2.5 trillion rupees well before the next CRR adjustment.
—
In summary, while India’s banking system is currently facing a liquidity crunch due to tax payments, several measures including government spending and CRR easing are set to restore ample liquidity soon.
https://www.newsbytesapp.com/news/business/temporary-liquidity-crunch-in-india-s-banking-system-right-now/story