RBI’s Extra Liquidity Support Likely to Wind Down After March

The Reserve Bank of India (RBI) provided temporary support to the banking system by adding extra liquidity to ease short-term money market stress. This was intended to help lower short-term borrowing costs and improve the flow of funds between banks after stress in early 2026. However, bankers now say this support is unlikely to continue beyond March 2026.

Read More - India’s Economic Survey Backs RBI Policy, Flags Strong Liquidity Transmission

In recent weeks, the Indian banking system has been sitting on a fairly large amount of surplus cash — on average about 1.1% of total bank deposits. This abundance of money dragged key short-term funding rates down, with the weighted average call rate falling close to 5% — below the RBI’s policy repo rate of 5.25%. In simple terms, banks were able to borrow money from each other at very cheap rates because there was so much cash floating around.

This extra liquidity was introduced in response to funding pressures seen in January, when short-term borrowing rates for companies and banks climbed to the highest levels in about 10 months. After the RBI’s intervention, these rates fell by roughly 15–30 basis points. But experts say this move was tactical and temporary, not a long-term change in policy.

Bankers believe that once March — the end of the fiscal year — is over, the RBI will begin to withdraw this extra liquidity and return to its normal liquidity management strategy. This may include using tools like Variable Rate Reverse Repo (VRRR) auctions, which absorb cash from the banking system when liquidity is very high. VRRRs were last used early in December and could be used again to prevent short-term rates from staying too low. 

Also Read - Liquidity Tightness Hits Banks As Loan Demand Rises

One reason for this shift is that letting the call money rate stay below the repo rate for too long would be unusual and could signal a deviation from the RBI’s standard framework for managing liquidity conditions. Ending the extra support after March would bring short-term rates more in line with policy goals and help ease volatility that usually comes at fiscal year-end due to tax payments and uneven government spending.

In essence, this Reuters report suggests that the RBI’s recent liquidity push has done its job in calming short-term funding stress, but now the central bank may withdraw this support soon and revert to normal operations — possibly tightening liquidity as needed through VRRR or other instruments.
 

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