Managing excess liquidity

Financial markets need more clarity

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Liquidity conditions in Indian banking have undergone a significant change over the last few quarters. While the system was in a deficit of about ₹2 trillion at the end of 2024, it now records a daily surplus of over ₹3 trillion, rising to ₹4 trillion on some days. Central banks sometimes keep the system in deficit or surplus to attain monetary policy objectives, but an excess on either side could lead to unintended consequences. The Reserve Bank of India (RBI), for instance, faced criticism for the liquidity deficit in recent quarters, which partly resulted from its intervention in the currency market to support the rupee, pushing up market interest rates. However, the situation changed as the pressure on the rupee abated and the inflation rate turned favourable.