Liquidity Squeeze of ₹6 Lakh Cr Planned Ahead of Rate Increase

The RBI’s upcoming monetary policy decision includes a plan to drain six lakh crore rupees of excess liquidity from banks. This measure is slated to accompany a 0.25‑percentage‑point rise in the repo rate, setting it at 5.5 per cent.

According to the research report, two lakh crore of the targeted liquidity can be neutralised by the current amount of currency in circulation. The balance will be dealt with using standard tools such as open‑market operation sales, foreign‑exchange spot sales, FX swaps and variable‑rate reverse‑repo facilities.

The note mentions that a decline in cash reserves will be incremental unless the RBI adopts stricter policies like increasing the cash reserve ratio. It also highlights that the services sector remains the main driver of core inflation, projecting an average inflation rate above five percent for the next year.

On the external front, oil prices staying above $100 per barrel and a revised 2027 price outlook of $85 per barrel add pressure. Higher global bond yields and a strong dollar are generally adverse for emerging markets, and India has recently experienced capital outflows as a result.