Why India’s banking system is facing a liquidity crunch?
**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, primarily driven by recent tax outflows. However, experts expect this situation to improve in the coming days, supported by government spending, bond redemptions, and upcoming policy measures.
### The Liquidity Situation: Tax Outflows Impact
On September 21, the liquidity surplus in the banking system fell sharply to ₹70 billion (approximately $794 million), marking the lowest level since the end of March. This drop was triggered by nearly ₹2.6 trillion exiting the system as taxpayers made income tax and GST payments.
The amount of cash circulating within banks influences market interest rates, including those on consumer loans. Vivek Kumar, an economist at Quanteco Research, notes that this liquidity shortage is likely temporary. He anticipates that increased government spending in the coming week will help neutralize the impact of the tax-driven outflows.
### RBI’s Perspective on Liquidity Levels
The Reserve Bank of India (RBI) is comfortable maintaining a liquidity surplus at around 1% of banks’ deposits, which translates to roughly ₹2.5 trillion. Prior to the recent tax-related withdrawals, the liquidity surplus had been averaging above this level.
Gaura Sengupta, Chief Economist at IDFC First Bank, expects liquidity levels to rise over the next few weeks. She highlights that government disbursements combined with a reduction in banks’ Cash Reserve Ratio (CRR) will support recovery efforts.
### Upcoming CRR Adjustments to Support Liquidity
Starting October 4, the RBI will initiate a phased cut in the CRR by a total of 100 basis points, distributed in four equal installments from September to November. The CRR is the portion of deposits that banks are required to keep with the RBI, and reducing it releases funds back into the banking system.
Vivek Kumar anticipates that these steps will help the liquidity surplus return to the ₹2 trillion–₹2.5 trillion range prior to the next scheduled CRR cut.
### Looking Ahead
While recent tax payments caused a temporary tightening of liquidity in India’s banking system, government spending, bond redemptions, and planned regulatory easing are expected to restore ample liquidity soon. Market participants and borrowers can anticipate more stable interest rates as this recovery unfolds.
https://www.newsbytesapp.com/news/business/temporary-liquidity-crunch-in-india-s-banking-system-right-now/story
