Expectations of stronger forex inflows have sparked discussions about a potential Cash Reserve Ratio (CRR) hike if surplus liquidity builds sharply by August, according to Business Standard. Market participants suggest a CRR increase of 25-50 basis points could be considered if the central bank seeks to absorb a portion of excess liquidity. The treasury head at a private bank noted that "the discussion around a CRR hike is being driven by the expectation that foreign inflows could result in a sizeable increase in system liquidity. If the liquidity impact becomes evident, August would be the logical time for any action." This represents a significant shift from the 100 bp CRR reduction announced in June 2025, which lowered the CRR to 3 per cent and was estimated to release about ₹2.5 trillion of primary liquidity by December 2025.
The Reserve Bank of India is expected to step up short-term cash withdrawal operations in coming months as surplus banking liquidity is projected to climb to pandemic-era levels of about ₹8 lakh crore ($85 billion), according to BofA Securities and Bandhan AMC Ltd. DBS Bank Ltd. expects the central bank to deploy a stronger tool in August by requiring banks to keep a larger proportion of deposits with the RBI. As per Ashhish Vaidya, head of treasury at DBS, there isn't "much room for short-end bonds to rally because if you account for the maturity of the RBI's short dollar forward book and a potential cash reserve ratio hike, you won't have that much surplus liquidity left in the system."
Net liquidity in the banking system stood at a surplus of ₹19,163 crore on Thursday, according to the latest data from the RBI, as reported by Business Standard. This represents a significant improvement from the ₹29,400 crore surplus recorded as of Wednesday, though it remains well below the ₹5.3 lakh crore high reached in April. The RBI conducted two variable rate repo (VRR) auctions on Wednesday, injecting ₹72,300 crore into the banking system at a weighted average rate of 5.26 per cent. Analysts estimate that the measures announced on June 5 could lead to a significant increase in durable liquidity, with surplus liquidity potentially rising to ₹8.5 trillion-9.5 trillion in coming months from around ₹5 trillion currently.
Short-end bonds have been the largest beneficiaries of foreign inflows after the government cut taxes on debt for global investors on June 5, with five-year notes yields declining by more than 30 basis points to 6.49 per cent, surpassing the decline in longer-term yields and putting them on track for their biggest monthly fall in more than a year, according to Business Standard. However, analysts expect the rally may lose steam as the RBI uses reverse repurchase operations to take out surplus cash, with Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank, predicting the five-year notes yield should stabilise around 6.50 per cent. The measures announced earlier this month to draw foreign capital and support the rupee include an incentive plan for overseas Indians on bank deposits as well as a program to boost foreign bond sales by state firms, which could attract as much as $80 billion.
Market experts expect the RBI to conduct more variable rate repo auctions in the coming weeks to manage liquidity conditions. V Ramachandra Reddy, head of treasury at The Karur Vysya Bank, noted that "considering the narrowing of surplus liquidity in the banking system and expectation of further outflows on account of goods and services tax payment, the central bank may conduct more variable rate repo auctions to support liquidity and keep overnight rates under check." Vaidya of DBS emphasized that "it will be important to reduce surplus liquidity," citing rising inflation risks as wholesale prices in May rose 9.68 per cent from a year ago. A cumulative ₹4.5 trillion liquidity injection is expected by the end of the second quarter of the current financial year, with the surplus potentially rising again toward month-end due to state spending and the central bank's dividend transfer to the government.