Banking Liquidity Turns Deficit In March On Tax Outflows, RBI Intervention

India’s banking system liquidity moved into a deficit of around ₹65,900 crore in March 2026, marking the first such instance this year, as tax-related outflows and foreign exchange intervention drained cash from the system, according to Reuters.

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This marks a sharp reversal from the average surplus of about ₹2.50 lakh crore recorded between February 1 and March 15. The deficit is the highest since December 29, reflecting tightening liquidity conditions toward the end of the financial year.

Drivers Of Liquidity Deficit

The liquidity squeeze has been caused by advance taxes, GST, as well as continued intervention by the Reserve Bank of India in the currency markets. Reuters has reported that the Reserve Bank of India has intervened in the currency markets with almost $20 billion in March as the rupee has been supported amidst continued volatility in global financial markets. 

All the above factors have caused a squeeze, which has resulted in higher rates of borrowing.

Impact On Short-Term Rates

The weighted average call rate rose to 5.35%, moving above the RBI’s policy rate. Between February 1 and March 15, the rate had remained below 5.25%, indicating tighter liquidity conditions in recent sessions.

Liquidity typically tightens toward the end of India’s financial year, which closes on March 31, as government tax collections increase demand for funds.

RBI Liquidity Measures

The central bank had pumped almost ₹1.80 lakh crore into the system via bond purchases in early March, according to a report by Reuters. Nevertheless, the recent trend of variable-rate repo (VRR) auctions has shown limited participation from banks.

There has been little response from banks to the short-term liquidity windows, which has caused the liquidity deficit to persist.

Outlook For Liquidity Conditions

Market players also sense that liquidity conditions would ease towards the end of March with increased government spending and inflows into the system. However, forex interventions and year-end fund demands may limit the improvement in liquidity conditions to some extent.

The current liquidity position reflects temporary factors linked to fiscal year-end dynamics and central bank operations, with system balances expected to stabilise as inflows resume.