Banking system liquidity slid to a deficit for the first time in over three years, squeezed by advance tax payments and ballooning government cash balances.
Key points
- The net liquidity injection was Rs 21,873.43 crore on September 20, bucking the trend of a surplus for the first time since May 2019, according to Reserve Bank of India (RBI) data compiled by India Ratings.
- Net surplus liquidity in the banking system was at Rs 8.03 lakh crore about a year ago.
Factors for liquidity deficit
There are various factors over the last few months that have led to the current situation:
- Improvement in demand for credit,
- The recent advance tax outflow, which is a quarterly phenomenon, has further aggravated the situation.
- There is the continuous intervention of the RBI to stem the fall in the rupee against the US dollar.
- Incremental deposit growth not keeping pace with credit demand.
What is liquidity in banking system?
- Liquidity in the banking system refers to readily available cash that banks need to meet short-term business and financial needs.
- On a given day, if the banking system is a net borrower from the RBI under Liquidity Adjustment Facility (LAF), the system liquidity can be said to be in deficit and if the banking system is a net lender to the RBI, the system liquidity can be said to be in surplus.
- The LAF refers to the RBI’s operations through which it injects or absorbs liquidity into or from the banking system.
- A tight liquidity condition could lead to a rise in the government securities yields and subsequently lead to a rise in interest rates for consumers too.
(Source: Indian Express)
