Mumbai: Baroda BNP Paribas Mutual Fund has released its latest Money Market Outlook report, highlighting robust liquidity conditions in the Indian banking system, supportive monetary dynamics, and selective investment opportunities in the fixed income market.
According to the report, the Indian banking system witnessed surplus liquidity exceeding ₹5 lakh crore in April 2026, marking the highest level in nearly four years. Average system liquidity remained above ₹4 lakh crore during the first half of April, supported by government securities (G-Sec) maturities worth ₹1.17 lakh crore till April 15, 2026.
The report noted that liquidity conditions improved sharply from ₹1.57 lakh crore in March 2026 to substantially higher levels in April. Excess liquidity also pushed overnight rates below the Reserve Bank of India’s policy repo rate of 5.25%, indicating abundant availability of funds in the system.
Liquidity Expected to Remain Comfortable
The fund house believes surplus liquidity is likely to stay above 1% of Net Demand and Time Liabilities (NDTL), estimated at around ₹2.5 lakh crore, through the first quarter of 2027. The report further stated that the RBI dividend payout to the government, expected in May 2026, could exceed ₹3 lakh crore, providing an additional liquidity boost to the economy.
At the same time, the report highlighted that 12-month Certificate of Deposit (CD) spreads remain elevated at nearly 200 basis points, reflecting prevailing risk premiums in the market.
However, the outlook also cautioned that geopolitical tensions could influence inflation trajectories and shape future interest rate expectations.
RBI Maintaining Growth-Focused Approach
The report observed that the Reserve Bank of India continues to maintain a proactive stance on liquidity management, while refraining from explicitly committing to aligning operational rates with the repo rate.
The central bank’s policy approach remains focused on supporting economic growth while carefully monitoring inflationary risks. The report expects calibrated rate hikes only towards the later part of calendar year 2026, primarily to manage demand-side inflation pressures.
It added that the prevailing liquidity surplus is aiding smoother transmission of policy rates and supporting government spending initiatives.
Preference for Longer Maturity Investments
On investment strategy, the report indicated a preference for overweight positions in longer maturity buckets, particularly in the January–March 2027 segment, to benefit from attractive spreads and higher accrual opportunities.
The fund house also emphasized maintaining high credit quality in portfolios, with more than 85% exposure allocated to AAA-rated and sovereign instruments.
While elevated spreads and term premiums continue to offer opportunities for investors, the report maintained a cautious stance on inflation risks arising from global geopolitical developments, suggesting that premature rate hikes could potentially hamper growth momentum.
Overall, the report projects a stable near-term money market environment, supported by strong liquidity conditions and measured policy actions from the RBI.
