Banking system liquidity falls below Rs 50,000 crore

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Banking system liquidity fell to less than Rs 50,000 crore on an average daily basis amid Reserve Bank of India (RBI) dollar sales to support the rupee, tax outflows, loose spending and slower deposit growth relative to credit growth.

The net liquidity absorbed by the central bank as of July 27 stood at 49,245.52 crore rupees, according to data available on its website, compared to 2.16 trillion rupees as of June 27. Wednesday. Market participants said the RBI stepped in by holding a three-day Rs 50,000 crore floating rate buyout auction on Wednesday to ease the liquidity crunch.

Saugata Bhattacharya, Chief Economist, Axis Bank, said the RBI had transacted nearly $1 billion a day over the past 10 days in forex interventions. “What contributed to the sudden liquidity crunch that necessitated a VRR auction yesterday (Wednesday) – and there may be more to come – is that government spending has not increased” , did he declare.

Central government balances with the RBI are estimated at Rs 4.5 trillion. “So it’s a latent pool of cash that can be deployed as the government spends,” Bhattacharya said. If government spending takes off and the pace of rate hikes in the US moderates, leading to normalized portfolio outflows, from the current level of Rs 50,000 crore, the surplus is expected to reach Rs 2-2.5 trillion rupees over the next month, he added.

Abhishek Goenka, Founder and CEO of IFA Global, said overnight rates, which were previously around 4.85%, rose to around 5.25%. “We could start to see volatility in overnight rates and imbalances in banks’ liquidity position if excess liquidity continues to run out,” he said in a statement on Wednesday.

In addition to the central bank’s defense of the rupee, which has resulted in the sucking up of some liquidity, a multi-month trend of deposit growth below credit growth is also contributing to the liquidity squeeze, some analysts said.

Madan Sabnavis, chief economist, Bank of Baroda (BoB), said that for liquidity conditions to ease, deposits must return to banks. “The liquidity crunch is happening because credit is growing much faster than deposits in the banking system. This, in turn, could happen because rates are low and savers may turn to the stock market or mutual funds. Also, high inflation could eat away at savings at the lower end,” he said.

Non-food credit outstanding with banks increased by 13.5% year-on-year (yr) during the fortnight ending July 15, while deposits increased by 8.35%.

Credit rating agency Icra said in a note on Thursday that banks’ reliance on certificates of deposit (CDs) had increased in recent months to fund demand for additional credit, with outstanding CDs rising 243% year-on-year as of July 1 to reach 2.4 trillion rupees. The spread on banks’ CD issuances widened from 30 basis points in April to 170 basis points (bps) over their six-month average deposit rates in July 2022.

Anil Gupta, Vice Chairman of ICRA, said as banks enter a seasonal peak for additional credit demand, their systemic liquidity will decline further as deposit growth continues to lag. of credit growth.

“We also expect the repo rate (and therefore SDF rates) to rise by 60 basis points by the end of September 2022 to 5.5%, which would further push up the yield of various benchmark instruments like T-Bills and therefore bank CD rates. , thereby widening spreads over bank deposit rates even further,” Gupta said, adding, “This will cause banks to start chasing deposits aggressively, which will also lead to higher deposit rates over the course of the year. for the next three quarters.

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