Business · India Bureau
RBI signals surplus liquidity to tighten beyond current fiscal year
Reserve Bank of India Governor Sanjay Malhotra has indicated that the banking system's excess liquidity is unlikely to persist beyond the current financial year. The central bank plans to manage fund absorption through currency operations and open market operations rather than raising reserve requirements.
LSN India ·
The Reserve Bank of India expects the surplus liquidity currently present in the banking system to dissipate by the end of the ongoing financial year, RBI Governor Sanjay Malhotra said. He attributed the projected tightening to natural currency leakage and the central bank's planned open market operations, which are designed to systematically absorb excess funds from the financial system.
Malhotra's remarks come as the RBI has been managing ample liquidity conditions that have prevailed in recent months. The central bank has multiple instruments at its disposal to manage liquidity, with currency circulation and OMOs serving as the primary mechanisms for absorbing surplus funds in the system.
In discussing the RBI's toolkit for liquidity management, Malhotra indicated that raising the Cash Reserve Ratio—the percentage of deposits banks must hold as reserves—remains among the least preferred options for the central bank. The CRR had been reduced during the pandemic to support credit growth and remains a more intrusive measure compared to market-based operations.
The RBI's liquidity management strategy reflects its calibrated approach to maintaining financial stability while supporting economic activity. By relying on gradual absorption mechanisms rather than sharp regulatory changes, the central bank aims to ensure a smooth transition as liquidity conditions normalize over the coming months.