The SBI Economic Research report has stated that the Mahakumbh festival has caused a cash outflow from the banking system. Many people have withdrawn money, but a large part of this cash may not be deposited back into banks. This has created a shortage of money in the financial system. According to the report, ₹1 trillion will be needed by March to balance the situation.
During Mahakumbh, most withdrawals were made by regular people (retail depositors), while new deposits mainly came from businesses and institutions (non-retail participants). Because of this, a large amount of money that left the banks may not return soon, making it harder for banks to manage liquidity.
Understanding Cash Leakage and Its Impact on the Banking System
Cash leakage happens when money moves out of the banking system and does not return quickly. This reduces the amount of money available for banks to give as loans or invest in the economy.
A recent report by SBI Economic Research says that the Mahakumbh festival has caused a large amount of cash withdrawals, mainly by retail customers. A big part of this money may not come back as deposits, which is creating a shortage of liquidity in banks.
How Cash Leakage Happens During Mahakumbh?
Mahakumbh is one of the largest religious gatherings in the world, where millions of pilgrims, small businesses, and service providers come together. Several reasons contribute to cash leakage during this event:
- Large Withdrawals by Pilgrims
- People withdraw cash to pay for travel, hotels, food, and donations.
- Small vendors at the festival mostly accept cash payments instead of digital transactions.
- Cash Stays in the Informal Sector
- Many small businesses, street vendors, and local service providers do not deposit their earnings in banks.
- This means money stays in circulation outside the formal banking system.
- More Withdrawals, Fewer Deposits
- While retail customers are withdrawing cash, most new deposits are coming from companies and institutions.
- Since less cash is returning to banks, banks are facing a shortage of funds.
Why Is This a Problem for Banks?
- Banks use deposits to give loans and support economic growth.
- When too much cash is withdrawn and not returned, banks struggle to maintain balance.
- This shortage of money in banks is called a liquidity deficit.
How Much Money Is Needed?
According to SBI Economic Research, to balance the system, banks will need an additional ₹1 trillion by March.
Other Factors Increasing Liquidity Shortage
Apart from Mahakumbh, other reasons are also causing a shortage of liquidity in the banking system:
- Foreign Investors Withdrawing Money
- Many foreign investors are pulling out their money from India, reducing funds available in banks.
- Upcoming Financial Commitments
- Some financial contracts will mature soon, requiring banks to release more cash.
What is the RBI Doing to Fix the Liquidity Issue?
The RBI (Reserve Bank of India) is taking several steps to increase liquidity in banks:
- Variable Rate Repo (VRR) Auctions – Short-term loans to banks.
- Open Market Operations (OMOs) – Buying government bonds to increase cash flow.
- USD/INR Buy-Sell Swap Auctions – Managing currency reserves while boosting liquidity.
- $10 Billion Swap Deal – A move to stabilize the market and ensure enough funds in the system.
What Can RBI Do in the Future?
The SBI report suggests that RBI should:
- Use the Cash Reserve Ratio (CRR) as a regulatory tool instead of a liquidity tool.
- Change the way it manages liquidity by replacing the Weighted Average Call Rate (WACR) as the main policy tool.
Conclusion
The Mahakumbh festival, along with foreign investor withdrawals and other financial issues, has led to a cash shortage in the banking system. To fix this, the RBI will need to inject more money into the system and possibly adjust its liquidity management policies.
