Banking Liquidity Deficit Down to ₹1.40 Lakh Crore: RBI

The liquidity situation in the Indian banking system has improved significantly in the first week of February 2024, as the government increased its spending and eased the pressure on money market rates. According to a report by MintGenie, the liquidity deficit in the banking system declined to about ₹1.40 lakh crore on February 4, from the recent peak of ₹3.46 lakh crore on January 24.

RBI’s monetary policy stance

The Reserve Bank of India (RBI) has been keeping liquidity tight in the banking system in tune with the “withdrawal of accommodation” monetary policy stance to ensure that inflation progressively aligns with the target while supporting growth. In his December 2023 monetary policy statement, RBI Governor Shaktikanta Das noted that the evolution of liquidity conditions has been in alignment with the monetary policy stance.

“Going forward, government spending is likely to further ease liquidity conditions. On our part, the Reserve Bank will remain nimble in liquidity management,” he said.

Impact on money market rates and inflation by liquidity deficit

The declining liquidity deficit also had a salubrious effect on the overnight money market rates, with the weighted average rate easing to 6.33 per cent on February 4, from around 6.50 per cent to 6.75 per cent last month. This could help lower the borrowing costs for businesses and consumers and boost economic activity.

However, the liquidity deficit could increase to ₹2 lakh crore-₹2.5 lakh crore as there will be outflows from the banking system due to GST payments in mid-February. This could put some upward pressure on money market rates and inflation.

The RBI has projected the retail inflation rate to average 5.3 per cent in 2023-24, within its target range of 4 per cent +/- 2 per cent. The central bank has also maintained its growth forecast at 9.5 per cent for 2023-24, despite the challenges posed by the Omicron variant of Covid-19.

Key takeaways

• The liquidity deficit in the banking system has declined to ₹1.40 lakh crore on February 4, from ₹3.46 lakh crore on January 24.
• The RBI has been keeping liquidity tight in line with its monetary policy stance to contain inflation and support growth.
• The lower liquidity deficit has eased money market rates and borrowing costs, but it could rise again due to GST payments in mid-February.
• The RBI expects inflation to average 5.3 per cent and growth to be 9.5 per cent in 2023-24.

Reecnt Blog: Flywire and SBI Simplify Payments for Foreign Students