Lack Of Banking Liquidity May Dampen India's Festive Cheer
On Wednesday, the liquidity deficit in the banking system had swelled to nearly Rs 1.5 lakh crore.
The ballooning of liquidity deficit—which has already touched Rs 1.47 lakh crore—will continue in the coming months and this would dampen consumer demand this festive season, analysts said.
On Wednesday, the liquidity deficit in the banking system rose to nearly Rs 1.5 lakh crore on the back of outflows linked to advance tax payments and GST remittances ahead of the end of September quarter. Besides the regular GST outflows at the end of every month, the deficit was a result of cash crunch due to the incremental cash reserve ratio imposed by the Reserve Bank of India in August.
Banks borrowed a record Rs 1.97 lakh crore under the RBI's marginal standing facility. MSF is a window for banks to borrow from the RBI when interbank liquidity dries up.
According to estimates, the I-CRR move sucked out over Rs 1 lakh crore from the banking system. RBI had announced a phased withdrawal of the I-CRR last week. While 25% has already been released, the central bank will release another 25% of the funds under I-CRR on Sept. 23. The remaining 50% will be available to banks from Oct. 7.
"Some part of the liquidity going into deficit was already expected because of the quarter-end outflows," said Sakshi Gupta, principal economist at HDFC Bank Ltd. "However, it is much more amplified due to 50% of the I-CRR in play and RBI interventions to tackle depreciation pressures in the rupee."
The growing liquidity deficit has lifted the short-term borrowing costs, analysts said. The interbank call money rate rose 110 basis points from last year to 6.75%, equivalent to the MSF rate. In the beginning of August, 10 days before the RBI announced I-CRR, the call money rate stood at 6.37%.
As the festive season picks up, there will be "some currency leakage", which would tighten the liquidity balance even as the seasonal impact of I-CRR fades out in early October, Gupta said.
Anubhuti Sahay, head of South Asia economics research at Standard Chartered Bank, agreed that festive buying in the coming months will result in lower money supply, thereby impeding credit growth.
"It would have an impact on the interest rates charged to the borrowers. By the end of the financial year, we see credit growth to moderate 10-11% from the current levels," Sahay said. India's GDP growth is projected to slow down at 5.4% in the second half of the ongoing financial year, according to Sahay.
RBI's nowcast model estimates second quarter GDP growth of 6.6%. Under the present conditions, India's gross domestic product is projected at 6.6% for the quarter ending September.
However, Vivek Kumar, economist at QuantEco Research, expects liquidity to turn surplus in the next couple of weeks amid the government’s month-end spending. While the current liquidity deficit has widened, the core liquidity stands at a surplus of over Rs 2 lakh crore, he said.
Core liquidity refers to the cash and other financial assets such as government bonds that banks possess, that can easily be liquidated and paid out as part of operational cash flows.
"The only thing that the RBI could have done is variable repo rate auctions, which would have put a slight amount of discomfort. As of now, the system is at MSF. If they had done VRR, the system would have been still above repo but below MSF," Kumar said.
