Why Indian economy has moved from liquidity crunch to liquidity glut
There's a demand slowdown; it's time to take a fresh look because supply-side solution (liquidity injection) is seemingly not working for a demand-side problem
Union Finance Minister Nirmala Sitharaman has repeatedly called on banks and non-banking financial companies (NBFCs) over the past month to ramp up lending.
Her appeal follows the Reserve Bank of India’s decisive move to boost liquidity by slashing the repo rate by 100 basis points—from 6.5% to 5.5%—and cutting the Cash Reserve Ratio (CRR) from 4% to 3% in the June Monetary Policy Committee (MPC) round. The minister emphasised the need for financial institutions to translate these rate cuts into greater credit flow across sectors
Reserve Bank Governor Sanjay Malhotra had declared after the last round of MPC that the central bank had injected Rs 9.5 lakh crore of “durable liquidity” since January 2025.
RBI is absorbing than injecting
But the RBI’s daily money market operations reveal a different story.
There is a daily liquidity glut, forcing the RBI to absorb, rather than inject, liquidity through its various market operations. Data show the RBI absorbed an average of Rs 2.2 lakh crore during July 1-21, 2025, surpassing Rs 3-4 lakh crore a day several times.
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Its daily absorption averaged Rs 2.6 lakh crore in June, Rs 1.9 lakh crore in May and Rs 1.7 lakh crore in April (see graph). The trend goes down further as the calendar rewinds.
Scheduled commercial banks (SCBs) moved from liquidity surplus in November 2024 to deficits in December 2024, January 2025, and February 2025. Now that enough liquidity is available, the SCBs are not in a position to lend enough.
Sliding demand
The banks’ credit outflow data show a clear lack of demand in the economy for more investment.
Growth in credit to non-food sector fell from 20.2 per cent in FY24 to 11 per cent in FY25. The latest data for March-May 2025 show non-food credit growth fell to 0.1 per cent, from 2 per cent in the corresponding previous fiscal. The fall is across the board, except for micro and small industries (industry) and vehicle loans and gold loans (personal loan).
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There are other indications of the slowdown in demand.
Latest data on output of eight core sectors – coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity – show, in Q1 of FY26, their combined growth fell to 1.3 per cent, from 6.2 per cent in the corresponding quarter of FY25. In fact, it was negative for coal, crude oil, natural gas and electricity.
Corporate performance
An analysis of early data of listed companies for Q1 of FY26 shows, net sales (demand) grew at the slowest in 16 quarters, and their dependence on non-core income for profitability is increasing.
Liquidity flush, demand drought: India’s economic mismatch
♦ RBI cut repo and CRR to boost lending
♦ Banks still not pushing loans despite liquidity
♦ RBI absorbing ₹2–3 lakh crore daily excess
♦ Credit growth slumps, demand across sectors weak
♦ Core sector growth slows to 1.3% in Q1 FY26
♦ GDP growth stagnates; slowdown deepens further
♦ Rate cut will make little difference while demand is tepid; RBI, Centre need to act on this
Annual reports show some of the top banks such as the State Bank of India, HDFC Bank and Axis Bank slowed down hiring in FY25 due to moderation in business, especially in retail.
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The economy is in a slowdown. The gross domestic product (GDP) growth fell from 9.2 per cent in FY24 to 6.5 per cent in FY25 and is expected to stagnate at 6.5 per cent in FY26 (as per the RBI's Bulletin).
There could be a further fall, going by the early indications for FY26 so far.
Liquidity glut
The slowdown in demand essentially means that the RBI’s cuts in repo and CRR will not work as demand credit and investment will remain low – producing a liquidity glut. Now is the time to take a fresh look because supply-side solution (liquidity injection) is seemingly not working for a demand-side problem.
The RBI had in its March bulletin listed four reasons for the liquidity crunch:
a) Advance tax payments
b) Capital outflows (FPIs)
c) Forex operations to check rupee depreciation
d) A significant jump in currency in circulation (currency leakage)
The task is cut out not only for the RBI but also the Centre to go into the liquidity glut and address the real elephant in the room: lack of adequate demand in the economy.
