India’s Banks are facing Cash Shortage of Rs 3.34 Trillion due to Tax Payments and Reduced Govt Spending

Currently, India’s banking sector is grappling with a significant challenge – a shortage of available funds. This situation has arisen due to heightened tax payments and a restrained approach to government spending. Observers are anticipating intervention from the central bank to inject more funds and address this growing deficit.
Liquidity Shortfall Statistics:
As of January 23, the liquidity deficit has surged to an alarming Rs 3.34 trillion ($40.18 billion), nearly tripling from the beginning of the month. This surge is attributed to increased tax collections and a discernible slowdown in government expenditures, according to A Prasanna, Head of Research at ICICI Securities Primary Dealership.
Calls for Central Bank Assistance
Banks in India are urging the central bank to ease liquidity conditions, given that overnight cash rates persistently exceed the recommended policy rate. On Wednesday, the call rate stood at 6.85 percent, and the TREPS rate was at 6.78 percent, both surpassing the repo rate of 6.50 percent.
Central Bank’s Measures and Short-Term Strategies:
The central bank has taken steps, such as conducting shorter-term repo auctions, to infuse cash into the banking system. However, it has refrained from injecting longer-term funds, prompting expectations of additional measures to alleviate the liquidity crunch.
Expert Analysis and Future Projections
Parul Mittal Sinha, Head of Financial Markets, India at Standard Chartered Bank, anticipates that the central bank will maintain a deficit in liquidity in the short term but gradually reduce its size. Sinha suggests that easing liquidity conditions could be interpreted as a signal for potential future interest rate cuts.
Central Bank Governor’s Perspective
Despite calls for a significant shift in monetary policy, RBI Governor Shaktikanta Das emphasized earlier this month that such a move would be premature, citing elevated inflation levels as a crucial consideration.
Anticipated Short-Term Repo Auction
Traders are anticipating the announcement of another short-term repo auction soon, as Rs 3 trillion of outstanding repos are set to mature on Thursday.
Economic Analyst’s Forecast
Gaura Sen Gupta, an economist with IDFC First Bank, underscores the necessity for the RBI to persist with Variable Rate Reverse Repos (VRRs) to meet liquidity demands. Gupta foresees the potential for overnight rates to align with the repo rate by the end of March or the beginning of April, driven by an anticipated increase in government expenditure as the fiscal year concludes.