Recent analysis suggests that the current strain on India's banking system liquidity is likely to be a temporary phenomenon. Several factors contribute to this expectation, including anticipated government spending and upcoming bond redemptions, which are poised to counteract the effects of recent tax outflows.

Vivek Kumar, an economist with Quanteco Research, anticipates that the liquidity shortage will be short-lived, with increased government spending expected to neutralize the impact within the coming week. Bond redemptions should further ease the situation. The Reserve Bank of India (RBI) is reportedly comfortable maintaining a liquidity surplus of approximately 1% of banks' deposits, which translates to roughly 2.5 trillion rupees.

In early April 2025, the Indian banking sector experienced a shift from a deficit to a surplus for the first time in over three months, largely due to aggressive fund injections by the RBI. This intervention effectively reversed one of the most severe cash crunches in the financial system's history. Data indicated a surplus of 717 billion rupees ($8.4 billion) as of March 29, 2025, with banks deploying excess funds with the Reserve Bank of India. The surplus further increased to 894 billion rupees on March 30, 2025.

The RBI's actions, including open market bond purchases worth 800 billion rupees, are aimed at ensuring sufficient liquidity within the banking system. These measures are designed to facilitate the transmission of lower borrowing costs, particularly after the RBI reduced interest rates for the first time in nearly five years in February 2025. It was widely expected that the RBI would implement further rate cuts at its April 9 policy review.

Since late January 2025, the RBI has injected over $70 billion (Rs 5,995,01 crore) into the banking system to alleviate the deficit, which had arisen due to the central bank's dollar sales to stabilize the rupee and advance tax payments by corporations. These measures have proven effective, with overnight borrowing costs easing to below the RBI's policy rate and 10-year sovereign bond yields hitting a three-year low.

Gaura Sen Gupta, chief economist at IDFC First Bank Ltd, stated that the RBI's focus is on ensuring positive system liquidity to enable the transmission of rate cuts. She projected a likely liquidity surplus by the end of March and suggested that the RBI has the capacity to inject 2 trillion rupees of cash in the fiscal year starting April 1.

Previously, India faced a significant liquidity deficit, which widened due to dollar sales by the RBI to protect the rupee from global headwinds. The banking system also braced for cash outflows due to quarterly advance tax payments by companies. However, the recent measures by the RBI have successfully mitigated these pressures, leading to improved cash conditions.