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Informist, Friday, Jun. 5, 2026

 

By J. Navya Sruthi

 

MUMBAI – The Reserve Bank of India is likely to keep systemic liquidity in a surplus of up to 1% of banks' net demand and time liabilities but prevent it from rising further. Traders expect the structural measures for the rupee that the RBI announced Friday to keep the liquidity in the banking system at a comfortable level, without needing frequent injections from the central bank.

Traders had mixed expectations from the RBI heading into the Monetary Policy Committee's rate decision. While some expected medium-term liquidity support through variable rate repo auctions of up to 90 days, others had feared the central bank may begin draining banking system liquidity as a first step to curbing the rise in inflation. The RBI expects CPI inflation to average 5.1% in the financial year 2026-27 (Apr-Mar), above its 4% medium-term target. RBI Governor Sanjay Malhotra's comments did suggest a more cautious approach from the central bank. 

 

"On the liquidity front, interestingly, the governor's shift in language--from ensuring "proactive and sufficient" liquidity to maintaining "appropriate" liquidity--reinforces the overall hawkish undertone of the June monetary policy," Siddhartha Sanyal, chief economist and head of research at Bandhan Bank Ltd., said.

 

However, market participants expect that the RBI would continue to provide short-term variable rate repo auctions as in the past to support the banking system's liquidity at the time of monthly and quarterly tax outflows. In fact, the RBI Friday announced that it would conduct a four-day VRR auction for INR 750 billion Monday in the wake of excise duty outflows.

 

The RBI will have to continue its balancing act as it seeks to maximise growth while curbing inflation, dealers said. The systemic liquidity surplus had reached an almost four-year high of INR 5.55 trillion in April. A repeat of such conditions is not expected following the change in commentary, with money market rates rising above the policy repo rate of 5.25% in the latter part of May and surplus liquidity falling.

 

Malhotra clearly flagged the risks to the economy from the continuing war in West Asia and the resultant rise in crude oil prices. The RBI has lowered its GDP estimate for FY27 to 6.6% from 6.9?rlier while raising its CPI estimate to 5.1% from 4.6% in April.

 

"They (the RBI) will give adequate liquidity, not excess or not very low also because they have to preserve growth," Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap LLP., said. "They will still boost growth and at the same time, to control inflation, they will not allow excess liquidity."

 

MORE FX, FEWER OMOs

The governor's comments suggested a liquidity surplus would prevail in June. The government's spending from the central bank's record surplus transfer of INR 2.87 trillion for FY26 will add to liquidity in the near term, Malhotra said in his statement Friday, as will the return of currency during the monsoon season.

 

Moreover, the RBI and the government announced several steps in tandem Friday to attract foreign capital. These measures to support the rupee are expected to bring in $40 billion-$50 billion of inflows. This will translate to a substantial increase in durable liquidity in the banking system, dealers said.

 

If this leads to the weighted average call rate drifting to the lower end of the liquidity adjustment facility corridor, the RBI may even drain liquidity through variable rate reverse repo auctions. The central bank may sterilise some of the foreign capital inflows by unwinding its dollar-rupee buy-sell swaps, though most of the inflows are expected to be allowed to hit the market for the rupee to appreciate.

 

"We expect liquidity conditions to remain comfortable over the coming quarter on account of capital flows (and possible RBI intervention to absorb some of these inflows) and reduced pressure on the rupee on account of the measures announced," HDFC Bank said in its June policy review. "On the other hand, the extent to which the RBI chooses to reduce its forward book size (which is a drain on liquidity) could determine the final impact on liquidity conditions."

 

Before the June policy, economists expected the RBI to infuse around INR 7 trillion of durable liquidity into the banking system in FY27 by purchasing bonds through open market operations to counter the draining of systemic liquidity caused by the central bank's persistent intervention in the foreign exchange market. With the rupee expected to stabilise, money managers do not see a great need for such durable liquidity infusion measures.

 

"I don't see any real reason for RBI to conduct OMOs, because successively we have seen that the concerns regarding fiscal slippage are abating," Killol Pandya, head of fixed income at JM Financial Mutual Fund, said. "As our concerns regarding fiscal slippage abate, as market liquidity improves, as government takes steps, RBI takes steps, and we find that as we go through time the things are not as bad as we anticipated, then the countercyclical measures (such as OMOs) are also not required."

 

HDFC Bank in its report said it continues to expect liquidity conditions to tighten during the second half of FY27, with the RBI's Monetary Policy Committee likely to begin hiking rates soon in response to higher inflation. The rate-setting panel Friday held the policy repo rate at 5.25%.  End

 

Edited by Rajeev Pai

 

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