Reserve Bank of India (RBI) has taken several measures to absorb the excess liquidity in the banks post demonetisation. It has introduced incremental CRR of 100% on deposits collected between September 16 and November 11,2016 effective from the fortnight beginning November 26. Subsequently, RBI has reviewed the situation and withdrawn the incremental CRR effective from 10th December, 2016. Secondly, it increased the market stabilisation Scheme limit to ₹ 6 lakh crore from earlier limit of ₹ 30,000 crore with a view to mop up additional liquidity from the system effective from 2nd December, 2016. For regular liquidity management repo and reverse repo both fixed and variable ones are used by RBI.

While adequate liquidity is essential for meeting the needs of the productive sectors, there is not a direct link between excess liquidity and lending rates. Lending rates are determined by quite a lot of factors, of which liquidity is one. RBI vide its guidelines on Interest Rate on Advances dated 17th December 2015 followed by Master Direction dated 29th March 2016 on Interest Rate on Advances, have directed all Scheduled Commercial Banks to calculate Base Rates using the Marginal Cost of Funds. The Government and RBI do not interfere in fixing the interest rate on loans. Presently, each bank fix the Marginal Cost Lending Rate (MCLR) based on RBI guidelines and varies from bank to bank.

This was stated by Shri Santosh Kumar Gangwar, Minister of State in the Ministry of Finance in written reply to a question in Lok Sabha.

Liquidity management measures: RBI used CRR, MSS and repo operations to absorb excess bank liquidity, influencing lending dynamics. RBI used an incremental Cash Reserve Ratio (later withdrawn), raised the Market Stabilisation Scheme limit to enable additional securities issuance, and employs fixed and variable repo/reverse repo operations to absorb excess liquidity. Liquidity is only one factor affecting lending rates; banks must compute base rates using the Marginal Cost of Funds and set their own Marginal Cost Lending Rate under RBI guidelines, with no direct government or RBI fixation of loan interest rates.