Cash Drain from Mahakumbh? Report Calls for CRR Cut for Better Liquidity

One of the world's largest religious gatherings, the Mahakumbh Mela in Prayagraj, has caused an unintentional cash outflow in the system, according to a State Bank of India (SBI) Economic Research report released on Tuesday. It also highlighted that the Reserve Bank of India will have to cut cash reserve ratio (CRR) to ease the prevailing liquidity pressure in the banking sector.

“…there is now inadvertent cash leakage because of Mahakumbh," the report stated.

SBI also highlighted that in Mahakumbh, the majority of the withdrawals were made by retail depositors whereas the accretion of fresh deposits has been with non-retail participants, ANI reported.

"Hence a significant part of the money may not come back to systemic deposits,” the report further added.

The report further highlighted that if ownership in government securities (G-secs) remains unchanged in FY26, the Open Market Operations (OMO) gap could still be around Rs 1.7trn, indicating the need for sustained liquidity measures.

"CRR cut is necessary to ease the pressure, RBI could look into using CRR more as a regulatory intervention tool/countercyclical liquidity buffer rather than as a liquidity tool in future," the report noted.

The SBI report also suggested that the central bank in the future can use CRR more as a regulatory intervention tool or a countercyclical liquidity buffer instead of relying on it as a liquidity mechanism.

Liquidity Concerns in Banking System

Indian banking system has witnessed its worst liquidity crunch in over a decade. The liquidity dropped to a deficit of Rs 0.65 lakh crore in December from a Rs 1.35 lakh crore surplus in the previous month. The deficit deepened to Rs 2.07 lakh crore in January before and stood at Rs 1.59 lakh crore in February.

Banking system liquidity refers to the availability of cash, short-term funds like trade credit, and other financial resources that enable banks to meet short-term payment obligations. A deficit in liquidity limits the banks' ability to lend, and thereby the country’s economic growth.

In January, RBI introduced a few measures to boost liquidity in the system such as OMO purchase auctions, 56-day Variable Rate Repo (VRR) auction and rupee and dollar swap auction of $5bn for a tenor of six months.