Bid-Ask Spread, Trading Volume, Volatility, Returns, Large cap Stocks, NSE, Granger Causality The triangular relationship between liquidity, volatility, and trading activity is complex in the Indian stock market, a rapidly growing and structurally unique emerging market. Traditionally, higher trading activity is assumed to enhance liquidity, but Indian market dynamics often reveal the opposite. Using Ordinary Least Squares (OLS) regression analysis, this study finds that increased trading activity particularly in mid-cap and small-cap segments can lead to a contraction in liquidity due to order imbalances and widened bid-ask spreads. The rise of algorithmic and high-frequency trading (HFT) since SEBI’s 2013 approval has contributed to short-term liquidity shocks during volatile periods. Increased volatility, measured through India VIX and price fluctuations, strongly correlates with reduced liquidity. Macroeconomic factors such as U.S. Fed rate hikes, geopolitical tensions, and domestic policy changes often trigger volatility spikes that dry up liquidity. Rising retail participation, especially via platforms like Zerodha and Groww in the F&O and small-cap space, has added to this effect, as emotionally driven trades worsen liquidity during market stress. Investing in the stock markets and trading securities in the stock market has gained a lot of popularity in India and awareness of this is growing in the country. Trading activity, while essential for price discovery, has also amplified speculation in India’s derivatives-heavy market, reducing overall liquidity during stress periods. SEBI's regulatory interventions like margin norms, circuit filters, and surveillance frameworks have had mixed outcomes in stabilizing market liquidity. Large-cap stocks (e.g., Nifty 50) show stronger liquidity resilience than mid- and small-caps. The withdrawal of Foreign Institutional Investors (FIIs), as seen during the 2022–23 global rate hike cycle, significantly reduces liquidity and increases volatility. Although mutual fund SIP inflows offer some stability, they are often insufficient during broad market corrections. The study concludes that volatility continues to negatively impact liquidity even after accounting for trading activity, emphasizing the need for effective risk management, better market-making systems, and improved retail investor awareness