SRINAGAR: India’s banking system has alternated between periods of liquidity surplus and deficit from November 2023 to February 2025, according to data presented in the Rajya Sabha on August 12. The Ministry of Finance said these fluctuations were driven by a mix of structural and seasonal factors, including rising currency in circulation, high government balances maintained with the Reserve Bank of India (RBI), foreign portfolio investment outflows, forex operations, and maturing forward transactions. In some months, the liquidity position eased due to increased government spending, but the pressures quickly re-emerged, prompting the RBI to actively manage conditions.
The government said the RBI’s liquidity management framework is designed to operate flexibly, moving between surplus and deficit modes depending on prevailing economic conditions. This approach aims to ensure that the productive requirements of the economy are met and that the transmission of monetary policy to market rates remains strong. Measures deployed during this period included reductions in the cash reserve ratio in a staggered manner, policy rate adjustments, open market operations, term variable repo rate auctions, and USD/INR buy-sell swaps.
To improve credit transmission, the RBI has since October 2019 required that all new floating rate personal and retail loans, as well as loans to micro and small enterprises, be linked to external benchmark linked rates (EBLRs). This has helped banks pass on changes in the policy repo rate more swiftly. In February 2025, the Monetary Policy Committee reduced the policy repo rate by 100 basis points, prompting scheduled commercial banks to lower their benchmark rates by the same amount. The government noted, however, that marginal cost of funds-based lending rates (MCLRs), which depend on banks’ cost of funds, typically take longer to adjust.
Provisional data from February to June 2025 shows that the weighted average lending rate fell by 71 basis points for fresh rupee loans and 39 basis points for outstanding loans. On the deposit side, the weighted average domestic term deposit rate dropped by 87 basis points for fresh deposits and 10 basis points for outstanding deposits. The government said these changes are expected to support credit growth, although the impact on inflation will be closely monitored.
