Banking Stocks Plunge as RBI Falls Short on Liquidity Measures

The banking sector experienced a downturn in trading following the Reserve Bank of India's (RBI) latest monetary policy announcement, which did not introduce any additional liquidity-easing measures. Although the central bank implemented its first interest rate cut in nearly five years—reducing the benchmark lending rate by 25 basis points to 6.25%—the move failed to uplift equity markets, as investors had already factored in this development.

In the previous Monetary Policy Committee (MPC) meeting on December 6, 2024, then-RBI Governor Shaktikanta Das had announced a 50-basis-point reduction in the Cash Reserve Ratio (CRR) to 4%. The CRR represents the portion of a bank’s total deposits that must be maintained with the RBI as reserves. This adjustment effectively freed up additional funds for banks, thereby increasing liquidity in the financial system.

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Following this, the central bank introduced several liquidity-boosting measures in January, injecting ₹1.5 lakh crore into the system.

As a result, market participants had anticipated that the RBI would introduce further liquidity measures beyond the expected 25-basis-point rate cut in the latest policy announcement. Analysts speculated that the central bank would continue to implement unconventional tools, such as liquidity and regulatory measures, to ease financial conditions subtly.

However, since no such initiatives were introduced in Governor Malhotra’s inaugural MPC meeting, investors responded by offloading banking stocks. By around 12:30 PM, the Bank Nifty index had declined by 0.5%, with leading losses observed in Bank of Baroda, State Bank of India, and ICICI Bank—each dropping up to 2% during trading.

Despite market disappointment over the absence of new liquidity measures, Madhavi Arora of Emkay Global stated, “While market participants are disappointed with no new explicit announcement on liquidity measures, we reckon such announcements do not need to be announced on the MPC policy platform per se and can be undertaken as and when needed.”

The RBI had previously announced Open Market Operations (OMO) purchases worth ₹60,000 crore as part of its liquidity injection efforts in January, with ₹20,000 crore already executed.

Avnish Jain, Head of Fixed Income at Canara Robeco Mutual Fund, highlighted that additional OMOs are likely, as the RBI has indicated its commitment to providing durable liquidity to mitigate systemic liquidity deficits.

Although the liquidity measures introduced in January are yet to be fully implemented, the near-term liquidity shortfall appears more manageable compared to the peak levels observed in January 2025.

Thanks to recent liquidity injections, the weighted interbank call rate (the overnight lending rate among banks) has settled below the repo rate (the interest rate at which banks borrow from the RBI overnight).

One reason the RBI is cautious about maintaining surplus liquidity is the potential weakening of the currency.

Adding to the banking sector’s cautious sentiment is the possibility that the transmission of the rate cut may be delayed, particularly for loans linked to the Marginal Cost of Funds-Based Lending Rate (MCLR).

“It is likely that some banks could increase the proportion of MCLR-linked loans over External Benchmark Lending Rate (EBLR)-linked loans to protect their margins, especially given the ongoing sluggishness in deposit mobilization,” commented Debopam Chaudhuri, Chief Economist at Piramal Group.

However, there is a positive development. The RBI Governor announced a deferment of the implementation of the Liquidity Coverage Ratio (LCR) norms until March 31, 2026, marking the conclusion of FY26.

Reports indicate that domestic banks had requested this postponement due to prevailing liquidity constraints. Originally, the LCR norms were scheduled to take effect from April 1, 2025. The proposed LCR framework, introduced in July 2024, mandated banks to apply an additional 5% 'run-off factor' for retail deposits that are accessible via internet and mobile banking (IMB) platforms.

Nonetheless, analysts suggest that further liquidity-boosting measures may still be necessary. Emkay Global projects that, without additional interventions, system liquidity could deteriorate by approximately ₹2.5 lakh crore by the end of March 2025.

Consequently, markets have adopted a wait-and-watch approach, closely monitoring the RBI’s next moves, particularly as the balance between economic growth and inflation remains precarious.