Mumbai, Oct. 26 -- Liquidity in India's banking system has turned negative for the first time in a month, as the Reserve Bank of India's (RBI) dollar sales to defend the rupee and higher cash withdrawals during the festive season drained funds from the market. The central bank could step in soon to ease the crunch, likely through open market operation (OMO) bond purchases or forex buy/sell swaps, market participants told Mint.

As of 23 October, liquidity in the banking system was in a deficit of Rs.2,645 crore. Market participants warn that if the outflows persist, core liquidity-system liquidity after accounting for government cash balances-could slip below 1% of the net demand and time liabilities (NDTL) by the March quarter. This will...