The Nifty Bank index dropped 1% to touch an intraday low of 54,709.05 points on Monday, October 12, as banking stocks faced significant pressure following the RBI's latest liquidity management measures. According to The Economic Times, the sectoral benchmark index recovered some of its intraday losses but was trading 0.83% lower at around 54,797 points as of noon deals. The decline came as investors reacted to the central bank's announcement of ₹25,000 crore worth of government bond issues and the increased daily CRR requirements for institutional lenders. SBI shares fell 2.1% to ₹938.10, while ICICI Bank declined 1.5% to ₹1,334.50. Punjab National Bank dropped 1.8% to ₹114.76, and Union Bank of India fell 1.5% to ₹170.31. Among the few gainers, HDFC Bank rose 0.3% to ₹704.50, while IndusInd Bank declined 1.4% to ₹849.25 and Axis Bank lost 1.1% to ₹1,244.
The Reserve Bank of India conducted an open market operation (OMO) sale of Government Securities (G-Secs) to absorb ₹25,000 crore from the banking system, despite the system maintaining a surplus liquidity of ₹3,35,901 crore as of October 12, 2026. As per The Hindu BusinessLine, at the auction of six G-Secs with maturities ranging from 2030 to 2034, market participants offered to sell securities aggregating ₹55,518 crore against the notified amount of ₹25,000 crore, with the RBI accepting only the notified amount. The benchmark 10-year bond (6.94% Government Security/ GS 2036) opened 2 basis points lower at 7.37%, tracking the decline in 10Y UST to 5.20 levels, and closed the day 2 basis points lower at 7.37% versus 7.39% earlier. The RBI is undertaking liquidity drain-out operations, including variable rate reverse repo (VRRR) auctions and OMO sales of G-Secs, to ensure the overnight call money rate is aligned with the repo rate of 5.50%.
The Reserve Bank of India has tightened cash reserve ratio (CRR) maintenance norms, raising the minimum daily maintenance requirement to 99% of the prescribed CRR from the existing 90%. According to The Economic Times, this decision takes effect from the fortnight beginning October 16, 2026, with banks required to maintain 99% CRR from that date. The move comes after the RBI increased the policy repo rate for the first time in nearly four years earlier this week, with the policy repo rate now at 5.5%. This represents the most stringent CRR requirement since July 2013, when similar measures were imposed amid heightened foreign exchange market volatility due to the US Federal Reserve's 'taper tantrum'. The change curtails the current flexibility that allowed banks to maintain less CRR on some days and more on others, ensuring the average CRR maintained in a fortnight remains at 3% of deposits.
At the auction of State Development Loans (SDLs) of 13 States, the RBI accepted bids aggregating ₹30,005 crore against the notified amount of ₹31,200 crore, with Nuvama noting that cut-offs were broadly along expected lines. According to The Hindu BusinessLine, State development loans continue to be a key component of the RBI's liquidity management strategy. The measures come alongside the RBI's efforts to support the rupee, including a special dollar window for three state-run oil-marketing companies, with foreign exchange operations potentially draining rupee liquidity. Higher bond yields translate into lower bond prices, potentially exposing banks to mark-to-market losses on parts of their government securities portfolios, while tighter liquidity conditions could also raise funding costs and weigh on treasury profitability.
Jefferies expects a small dilution in banks' net interest margins, estimating a potential 1-2 basis point increase in funding costs due to the CRR hike. According to The Economic Times, Jefferies India equity analysts noted that "At 100% CRR, banks would carry ₹8 lakh crore in CRR. If this lifts balances by 5-10%, it can withdraw ₹400-800bn of liquidity & add 1-2 bps to cost of funds. It is a small dilution of NIMs & banks may be able to pass to borrowers." The brokerage said the impact on net interest margins would be limited and banks may be able to pass on the higher costs to borrowers. On the bonds issue front, JP Morgan analysts said that RBI's OMO sales of ₹25,000 crore bonds will suck out the liquidity further from the system, with "These measures would suck out ₹50,000 crore of durable liquidity from the system. Banking system liquidity is likely to tighten in the coming days, which should move money market rates closer to the policy rate."
Madan Sabnavis, Chief Economist at Bank of Baroda, described the increase as a temporary measure to address excess liquidity rather than an actual CRR hike, noting that the overall CRR requirement itself has not changed. According to Business Standard, he expects the measure to ensure the transmission of the 25-basis-point repo rate cut announced by the central bank on October 7. Gaura Sengupta, Chief Economist at IDFC FIRST Bank, explained that the change will ensure tighter CRR compliance on a day-to-day basis, ensuring call rate moves towards the repo rate. Bankers noted that the increase to 99% will reduce banks' flexibility in managing their funds on a daily basis, requiring them to maintain a higher proportion of the prescribed reserves with the RBI each day. A senior banker with a state-owned bank said the move will leave banks with less funds available for other uses, though the overall impact may be limited as banks have generally been maintaining CRR balances of more than 95% of the prescribed requirement.
