India's Banking Liquidity Paradox: Massive Infusion, Hardening Yields

• RBI infused Rs 17.7 trillion in liquidity from Dec 2024 to Jan 2026, shifting focus to growth prioritization.
• Despite massive injections, banking system liquidity remains low at Rs 1.5 trillion (0.6% of NDTL) as of Jan 2026.
• Money-market rates, like 3-month CD rates, surged by 140 bps to over 7.20% by Jan 2026, indicating intense liquidity pressure.
• Primary drivers of liquidity drain were RBI's large-scale dollar sales (60%) and currency withdrawals (30%).
• An interim trade agreement with the US is expected to ease external account pressures and improve domestic liquidity.