RBI may need to infuse Rs 2 trillion by FY26 as banking liquidity contracts sharply, says an Emkay Global report. The crunch is due to heavy FX intervention, currency leakage, and muted government spending, threatening to push liquidity below RBI’s comfort zone.
The Reserve Bank of India (RBI) may need to infuse nearly Rs 2 trillion in the remaining months of FY26 to maintain comfortable liquidity levels, according to a new report by Emkay Global Financial Services. The report highlighted that India’s banking system liquidity has contracted sharply since September, prompting these expectations.
Sharp Contraction in System Liquidity
Emkay Global further highlighted that the liquidity surplus, once above 1% of Net Demand and Time Liabilities (NDTL) through June, has now slipped below 0.5%. Analysts attribute the tightening to a combination of seasonal currency leakage, muted government spending, tax outflows, and most notably, heavy unsterilized foreign exchange intervention by the RBI.
RBI has conducted an estimated USD 22-25 billion of spot FX intervention since September, draining durable liquidity significantly. The central bank has simultaneously rebuilt a short USD forward position, which rose from USD 53 billion in August to nearly USD 64 billion by October.
Impact of Maturing Forward Contracts
This buildup, illustrated in the forward FX position graph on page 3, is expected to exert additional liquidity pressure as forward contracts mature, the report added. It further notes that nearly USD 37 billion of RBI’s buy-sell forward contracts will mature over the next three months. If the RBI takes delivery of even 30% of these exposures, the domestic liquidity system could see a further drain of roughly Rs 1 trillion.
Other Contributing Factors
The surge in currency in circulation (CIC) has also intensified system tightness. FY26’s CIC leakage has already reached Rs 1.47 trillion, far higher than the previous year and consistent with a decade-long trend.
Outlook and Emkay’s Recommendation
As per Emkay’s report, the liquidity projections, if no significant OMO (Open Market Operations) injections occur, system liquidity could fall to 0.2-0.3% of NDTL by end-FY26, far below the RBI’s informal comfort threshold of 1%.
Madhavi Arora, and Harshal Patel, Economists at Emkay said that additional liquidity injections would be “far more efficacious” than debating the timing of another rate cut. Higher liquidity would help stabilize money market rates, ease transmission, and support demand-supply balance in government securities. They also note that previous easing cycles typically ended with liquidity surpluses well above 2% of NDTL significantly higher than current levels. (ANI)
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