India’s Banking System facing Liquidity Deficit, RBI has injected Rs.6,956 Crore into System
After maintaining a surplus liquidity of approximately ₹1.4 lakh crore for over two months, the banking system faced a liquidity shortfall, prompting the Reserve Bank of India (RBI) to inject ₹6,956 crore on Monday.
Liquidity refers to the ease with which an asset or security can be quickly converted into cash without affecting its market price. It is a measure of how quickly and efficiently an asset can be bought or sold in the market.
Liquidity deficit refers to a situation where there is a shortage of cash or funds in the banking system, meaning that banks collectively do not have enough liquid resources to meet their short-term operational and lending needs.
Causes of the Liquidity Deficit
Economists attribute the liquidity deficit to several factors:
- Negative Balance of Payments (BoP): The ongoing quarter has seen a BoP deficit of $23 billion due to persistent foreign portfolio investor (FPI) outflows. This means that the balance of payments turned negative by $23 billion in the ongoing quarter, largely due to foreign portfolio investor (FPI) outflows and the Reserve Bank of India (RBI) selling dollars to stabilize the rupee.
- RBI Dollar Sales: To stabilize the rupee, the RBI has been selling dollars in the market.
- Widening Trade Deficit: India’s merchandise trade deficit rose to $27.14 billion in October, compared to $20.78 billion in September. This increased the need for dollar outflows to pay for imports. This results in reduced rupee availability in the system.
Impact on Borrowing Costs
The liquidity deficit has pushed the weighted average call rate (WACR) 22 basis points higher than the policy repo rate, reaching 6.72% on Monday. This increase in WACR has raised borrowing costs for banks and companies, affecting instruments such as certificates of deposit and commercial papers.
Expert Insights on Liquidity Tightness
Gaura Sen Gupta, Chief Economist at IDFC First Bank, stated:
“The system liquidity deficit is driven by the negative BoP in Q3FY25, a widening trade deficit, and rising FPI outflows since October 2024, leading to RBI’s dollar sales. Core liquidity has reduced from peak levels, indicating that liquidity tightness could persist if BoP outflows continue.”
Core Liquidity Decline
Core liquidity, which includes system liquidity and government surplus, has dropped from a peak surplus of ₹4.6 trillion on September 27 to ₹1.6 trillion by November 15.
Decline in Forex Reserves
India’s foreign exchange reserves fell by $17.8 billion in the week ending November 15, reaching a four-month low of $657.9 billion, according to RBI data.
Additional Factors Affecting Liquidity
Economists also point to a slowdown in deposit growth and monthly GST payments as contributors to the liquidity crunch in the banking system.
