Liquidity Squeeze: India’s Durable Funds at 5-Month Low Amid RBI Forex Moves

Updated: November 17, 2025 12:01

Image Source: The Economic Times

India’s durable liquidity in the banking system has declined to its lowest level in five months, driven by the Reserve Bank of India’s active foreign exchange operations aimed at stabilizing the rupee. This has led to tighter liquidity conditions, impacting short-term interest rates and banking sector dynamics.

India’s banking system is witnessing a notable dip in durable liquidity, reaching its lowest point in five months. This contraction is primarily attributed to the Reserve Bank of India’s (RBI) intensified foreign exchange market interventions aimed at curbing rupee volatility amid global economic pressures.

Key Highlights:

Liquidity Dip: Durable liquidity—considered more stable and long-lasting in the system—has shrunk, reflecting the RBI’s forex operations that absorb liquidity while defending the rupee.

Forex Operations: Since early November, RBI’s substantial purchases of government securities and proactive dollar sales have absorbed significant funds, tightening the money supply.

Interest Rate Impact: Reduced liquidity has contributed to a rise in short-term interest rates, including the interbank call money rate hovering around 5.3-5.4%, compared to the previous comfortable range.

Systemic Perspective: While RBI’s purchases have cushioned bond yields, the liquidity shrinkage poses challenges in maintaining steady money market conditions.

Banking Sector Funds: Despite liquidity tightening, scheduled commercial banks maintain robust cash balances with the RBI, hovering near ₹7.75 trillion, close to regulatory requirements.

Outlook for Liquidity Management: Analysts expect RBI to fine-tune liquidty operations in the near term, balancing forex defense with systemic stability, potentially resuming Variable Rate Reverse Repo auctions to infuse liquidity.

Macro Implications: The liquidity squeeze coincides with government fiscal spending and tax collections pressures, complicating monetary policy’s role in supporting economic growth.

Market participants are watching RBI’s liquidity management strategies closely, as sustained tight conditions might affect credit availability and borrowing costs, influencing economic momentum.

Sources: Informist Media reports, Reuters, Economic Times, and financial market data from RBI and clearing corporations.

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