News

Published: September 21, 2023
Updated: September 21, 2023

India's Banking System Grapples with Mounting Liquidity Deficit

The Indian banking system is currently facing its most substantial liquidity deficit since January 2020, reaching nearly Rs 1.47 trillion. The Reserve Bank of India (RBI) has responded with sizable injections of funds, but doubts linger regarding their adequacy.

The Ongoing Struggle:

This liquidity shortfall marks the highest since 2020 when it soared to Rs 3 trillion. The RBI recently infused Rs 1.47 trillion on Monday and an additional Rs 1.46 trillion on Tuesday. Despite these measures, market analysts remain skeptical, believing that the disbursement of Rs 25,000 crore as the second tranche of the Incremental Cash Reserve Ratio (I-CRR) may fall short. As tax outflows and the festive season approach, liquidity could tighten further, reaching Rs 2 trillion in the short term.

Market Insights:

Market participants are wary of the forthcoming outflows and potential cash drainage during the festival season. Concerns arise from several factors, including a lack of substantial dollar inflows and the RBI's cautious approach to introducing durable liquidity. Experts suggest that the liquidity deficit might eventually escalate to Rs 3 trillion, albeit not in the immediate future.

Short-Term Liquidity Pressure:

The banking system is likely to grapple with liquidity pressure until the end of September, with signs of improvement expected as October begins.

RBI's Phased Approach:

On September 8, the RBI announced its decision to phase out the I-CRR by October 7, with disbursements occurring gradually. A quarter of the total I-CRR will be released on September 19, followed by another 25% on September 23, and the remaining 50% scheduled for release on October 7.

Multiple Pressures:

The liquidity challenge is compounded by advanced tax flows and the rupee's depreciation beyond 83. RBI interventions have absorbed some rupee liquidity from the system. Liquidity is anticipated to remain under pressure until the end of September, with improvements expected at the start of October.

Rates on the Rise:

Market rates reflect the liquidity situation, with the weighted average call rate surging to 6.82%, and the tri-party repo rate (TREPS) exceeding the marginal standing facility rate at 6.76%.

Stable but Elevated Rates:

Money market dealers anticipate that overnight money rates have reached current levels. These rates are expected to remain relatively stable, fluctuating between 4-5 basis points. While rates are elevated, significant increases beyond these levels are not anticipated.

India's banking system confronts a formidable liquidity challenge, with uncertainties surrounding the effectiveness of RBI's interventions. Liquidity pressures are likely to persist through September, affecting various market rates. While rates remain elevated, significant spikes are not currently anticipated. Market participants await signs of liquidity stabilization as they navigate these challenging financial conditions.