India’s Banking System Faces 4-Year High Liquidity Deficit. Can the Sector Recover?

India's Banking System Faces 4-Year High Liquidity Deficit. Can the Sector Recover?

In a shocking turn of events, India’s banking system liquidity deficit is at its widest in over 4 years and this is happening amid tax outflows and the lack of any major inflows, traders said on Wednesday. 

For those not familiar with the concept, liquidity in the banking system refers to readily available cash that banks need to meet short-term business and financial needs. 

According to reports, as of September 18th, the banking system’s liquidity shortfall had increased to 1.47 trillion rupees ($17.67 billion), which is the highest one-day shortfall since April 23, 2019, while banks had borrowed a record 1.97 trillion rupees from the central bank’s Marginal Standing Facility window. 

Advance tax payment took place last week, while outflows towards Goods and Service tax will be completed by Wednesday with bankers estimating aggregate outflows of up to 2.5 trillion rupees. 

The impact was so great that a significant amount of cash was blocked by the incremental cash reserve ratio (I-CRR), making it unavailable for use.

According to traders, the RBI is gradually phasing out the I-CRR, which was imposed on banks in August, but doing so is making the liquidity even tighter.

In contrast to the government’s month-end inflows, which will only begin in the final week of September, the central bank will release 25% of the I-CRR funds on September 23 and the remaining 50% on October 7.

Ankit Kapoor, Head of Research from Commodity Samachar said ” With the increase in global inflation, measures have to be taken by the Central Banks to keep liquidity in control. With the rampant multi-week high of Crude oil, banks have to maintain this. Th RBi will keep liquidity tight to maintain the short-term rate. However this is just a temporary factor, and it will improve in the months to come.”

The liquidity deficit will, however, narrow towards the end of this month and the beginning of October as government spending picks up the pace and the I-CRR completely winds down.

Commodity Samachar

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