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The banking systems liquidity enters deficit mode

October 05, 2022

For the first time since May 2019, banking system liquidity has fallen into deficit territory.

Important information
On September 20 of this year, the banking system's liquidity situation had deteriorated to the tune of Rs.21,873.4 crore.

The liquidity surplus was Rs.6.7 lakh crore on the same day last year.

The deficit was caused by increased bank credit, advanced tax payments by corporations, Reserve Bank of India interventions in the foreign exchange market, and incremental deposit growth that did not keep pace with credit demand.

One of the causes of the deficit is the RBI's persistent intervention to stop the rupee's fall against the US dollar.

The outstanding bank credit as of August 26 was Rs 124.58 lakh crore. This represents a 4.77 percent increase over March 2022.
During the same time period, however, deposit growth was only 3.21 percent.
If the banking system's liquidity is in deficit, government securities yields may rise, resulting in an increase in interest rates for consumers.

If liquidity is scarce, short-term interest rates will rise faster.

An increase in the repo rate would cause banks to raise their repo-linked lending rates as well as their funds-based lending rates, to which loans are linked.

Concerning banking system liquidity

In the banking system, liquidity refers to the amount of readily available cash that a bank needs to meet its short-term business and financial needs. The banking system's liquidity is said to be deficit if it is a net borrower from the RBI under the Liquidity Adjustment Facility (LAF). The system liquidity is surplus if the bank is the net lender to the RBI. The Liquidity Adjustment Facility (LAF) is a tool used by the central bank to inject or absorb liquidity into or out of the country's banking system.