Decoding CRISIL’s Report: How a Liquidity Deficit is Tightening India’s Financial Conditions


Yash Vora

3/24/20242 min read

Even little changes in liquidity can greatly impact the financial markets' intricate environment. The well-known international analytical firm CRISIL recently published a report that clarified how India's financial situation is becoming more precarious as a result of a liquidity shortage. Let's examine this report's intricacies and comprehend its ramifications.

Beginning with the­ explanation of a cash crunch, the study underlines the adverse consequences of this concept on the smooth functioning of the fiscal system. When cash demand exceeds the available money, the marke­t suffers a disequilibrium, leading to a liquidity crunch in India. This disequilibrium is capable of triggering a chain of incidents impacting dive­rse sectors and economic pursuits.

One of the primary effects the report focuses on is the implementation of stricter financial laws. The loss of liquidity raises borrowing costs for both individuals and businesses. Liquidity shortages pose challenges to economic growth, discouraging investment and consumption. It also fuels market volatility, making investment decisions harder.

CRISIL's industry analysis highlights the impact of the liquidity crunch on different sectors. Industries heavily reliant on credit, such as construction, real estate, and SMEs, face particular risks. Reduced lending opportunities limit their growth potential, which in turn slows down overall economic activity.

The paper also explores the tactics used by financial institutions to maintain their liquidity in these difficult times. To properly navigate the liquidity squeeze, banks and non-banking financial corporations (NBFCs) must reevaluate their lending procedures and risk management frameworks. To reduce liquidity concerns, this frequently means diversifying funding sources and raising credit criteria.

Regarding the policy implications, the research emphasizes how crucial it is to take proactive steps to reduce the liquidity shortfall. To add liquidity to the economy, the Reserve Bank of India (RBI) uses a variety of monetary instruments. Its tools include open market operations, modifications to reserve requirements, and revisions to monetary policy rates. Fiscal measures can also be necessary to boost liquidity and increase demand in particular industries.

To address the current issues, CRISIL's study provides both a view and suggestions. In addition to offering solutions for stakeholders to negotiate uncharted territory, it projects the trajectory of India's liquidity difficulties. Companies should carefully monitor their liquidity concerns, and investors should adjust their portfolios as market conditions change. To bring the financial system back into balance, policymakers are imploring them to be watchful and take focused action.

To sum up, the informative study from CRISIL is a useful tool for understanding the complexities of India's liquidity shortfall and how it affects the country's financial situation. Stakeholders can more adeptly traverse the changing terrain of India's financial markets by comprehending these dynamics and following the suggestions made.

Thank you.


Anuj Khedaria,

Kautilya, IBS Mumbai.