<p>The importance of bank liquidity in ensuring bank stability has been a long-standing discussion. This paper attempts to examine the role of excess liquidity in bank stability–liquidity creation links in India. The <i>Two-Stage Least Square (2SLS)</i> methodology has been employed to estimate the nexus, covering 40 banks from 2006 to 2024. The results suggest a positive role of excess liquidity in bank stability–liquidity creation nexus. However, the results are heterogeneous for bank groups, i.e., all banks, public and private sector banks, and for different types of excess liquidity and liquidity creation. The total and voluntary excess liquidity play a positive role in bank stability–on-balance-sheet liquidity creation nexus for all banks and private sector banks only. Moreover, bank stability (aided by excess liquidity) does not cause any impact on total liquidity creation for any bank groups. The findings suggest the need for bank stability (supported by excess liquidity) to augment liquidity creation.</p>