India’s tightening liquidity conditions are putting fresh pressure on policymakers, with market participants seeking measures such as tax relief for foreign investors and the revival of NRI-focused deposit schemes.
The Reserve Bank of India (RBI), however, is signalling that the current stress does not warrant a return to crisis-era interventions used during the 2013 taper tantrum.
The strain has become increasingly visible across the banking system as deposit growth continues to trail credit expansion. To bridge the gap, lenders have sharply raised rates on bulk deposits and certificates of deposit (CDs), with smaller banks offering more than 8% to mobilise funds.
Treasury officials say the surge reflects tight liquidity rather than pricing strategies, underscoring the structural challenge of sustaining loan growth without adequate deposit inflows. Uneven deposit mobilisation, particularly weaker household savings, has added to the pressure.
The situation has revived calls within the market to reintroduce NRI deposit windows that helped draw over $30 billion during the 2013 episode and stabilise the rupee. Bankers argue that such schemes could support deposit creation and bolster demand for government securities as borrowing requirements rise.
But policymakers appear cautious. Economists note that India’s foreign exchange reserves remain comfortable, providing nearly 10 months of import cover. Instead of short-term measures, the RBI is looking to strengthen capital inflows through the gradual liberalization of foreign direct investment norms and external commercial borrowing frameworks.
Analysts note that the current situation is quite different from 2013 when India faced country-specific vulnerabilities and relatively low forex buffers. Remittances and NRI deposits have also been affected by global uncertainties. Contingency measures in place, including currency swap arrangements, are seen as adequate.
Equity investors have also called for the removal of capital gains tax on foreign portfolio investments to boost returns. However, that is unlikely to happen.
For now, policymakers appear inclined to prioritise structural reforms over immediate interventions, even as tighter liquidity and volatile global flows continue to test the banking system’s funding dynamics.