
According to recent data from the Reserve Bank of India (RBI), the liquidity deficit in the banking system decreased to approximately ₹1.40-lakh crore on February 4th. This marks a significant drop from the recent peak of ₹3.46-lakh crore recorded on January 24th. The reduction in liquidity deficit is attributed to increased government spending.
Impact on Overnight Money Market Rates
The decline in liquidity deficit has positively affected overnight money market rates. The weighted average rate has eased to 6.33 per cent, compared to the range of 6.50 per cent to 6.75 per cent observed in the previous month.
RBI’s Monetary Policy Stance
The RBI has been maintaining tight liquidity in the banking system as part of its “withdrawal of accommodation” monetary policy stance. This approach aims to ensure that inflation gradually aligns with the target while still supporting overall economic growth.
Factors Contributing to Liquidity Improvement
V Rama Chandra Reddy, Head of Treasury at Karur Vysya Bank, attributes the reduction in liquidity deficit to the government’s release of contract payments and salaries in the first week of February.
Potential Challenges Ahead
Despite the current improvement, there is a possibility that the liquidity deficit could rise again to ₹2-lakh crore-₹2.5-lakh crore. This anticipated increase is due to expected outflows from the banking system resulting from GST payments in mid-February.
RBI’s Forward-Looking Approach
RBI Governor Shaktikanta Das, in the December 2023 monetary policy statement, highlighted the alignment of liquidity conditions with the monetary policy stance. He also indicated that government spending is likely to further ease liquidity conditions. The RBI commits to remaining agile in liquidity management in the future.