Liquidity deficit in banking system at five-year high

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AHMEDABAD: India's banking system's liquidity deficit hit its highest level in nearly five years on Tuesday due to the Goods and Services Tax (GST) payment, but economists expect the deficit to narrow next week. Or the amount that needs to be borrowed from the central bank ie the liquidity deficit was $20.90 billion ie 1.74 trillion rupees on Tuesday.

According to economists, this was the largest deficit since December 26, 2018. In 2018, this deficit reached 1.86 trillion rupees.

A top official of a state-owned bank said on a confidential basis that there has been a GST outflow of about Rs 1.4 lakh crore since Monday. An outflow of around Rs 1.20 to 1.3 lakh crore was expected.

The RBI has tightened monetary policy to curb inflation and said in October that it plans to sell bonds through auctions to manage banking liquidity. There is an outflow of funds from the banking system due to tax payments.

Interestingly, the overnight money market rate is trading above Reserve Bank of India's marginal standing facility rate of 6.75% due to liquidity issues. This situation of system liquidity with deficit now suggests that the RBI will not have scope to sell bonds till December.

An economist at India Ratings and Research expects that banking liquidity should pick up next week with a pick-up in government spending and bond redemptions but not a liquidity surplus.

Due to payment of GST money flows outside the banking system. Liquidity strain is also being seen as a result of government spending cuts due to state assembly elections.


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