Liquidity Deficit Might Spike To Rs 2 Lakh Crore By March-Finish

Liquidity Deficit May Spike To Rs 2 Lakh Crore By March-End

The Indian economic system is bracing for an additional bout of tight liquidity over the subsequent two weeks, as a number of things result in an outflow of funds from the banking system. Advance tax and GST funds, larger leakage of foreign money forward of the election and a niche in credit score and deposit development may result in a money crunch and power the central financial institution to step-in with extra liquidity soothing measures, senior economists and market specialists advised BloombergQuint.

At current, whereas liquidity is in deficit, the hole is small was at about Rs 31,200 crore, as on March 13. This deficit may rise sharply to over Rs 2 lakh crore over the subsequent two weeks. To make certain, a big a part of this deficit, created by tax outflows, will seemingly show to be transient.

In response to market members, the maths may look one thing like this:

  • About Rs 1.three lakh crore to Rs 1.5 lakh crore would movement out on account of advance tax funds.
  • One other Rs 90,000 crore would wish be paid within the type of GST.
  • These seasonal outflows will come atop a pre-election enhance in foreign money in circulation and a niche between deposit development and credit score development.

Collectively, this might imply important liquidity tightness, say economists.

Past Seasonal Components

Other than the seasonal tax outflows, larger foreign money in circulation forward of the elections is placing strain on system liquidity.

For the week ended March 8, the newest information obtainable, foreign money in circulation rose a steep 1.2 p.c over the earlier week to hit Rs 21.32 lakh crore. The ratio of foreign money in circulation to GDP is on the right track to the touch 11.2 p.c by the top of FY19, mentioned Sure Financial institution in a report on Thursday.

There is also some extra foreign money leakage as a result of basic elections and the brand new farm earnings switch scheme. “The switch fee from the central authorities (by way of PM-Kisan scheme) together with few state governments (varied schemes) may additionally doubtlessly enhance the demand for foreign money within the coming quarters,” Rao mentioned.

Increased foreign money in circulation is one purpose why financial institution deposit development has been slower than financial institution credit score development. Financial institution credit score grew at 14.5 p.c for the fortnight ended March 1, whereas financial institution deposits rose by 9.Eight p.c.

“Financial institution credit score development this yr has been larger and has surpassed deposit development. This has been the important thing issue constraining liquidity within the banking system in current months since Oct’19,” mentioned Madan Sabnavis, chief economist at CARE Rankings.

RBI’s Liquidity Assist Choices

The RBI has supplied giant quantities of liquidity assist to the markets by FY19, principally by bond purchases underneath its open market operations (OMO) program.

The central financial institution has purchased bonds value Rs 2.Eight lakh crore or almost 75 p.c of the provision of presidency securities. Given the situations, the RBI had no choice however to actively use OMO bond purchases to ease liquidity, mentioned Soumyajit Niyogi, Affiliate Director, India Rankings & Analysis

Nevertheless, the RBI is now choices apart from bond purchases to infuse liquidity. That is partly as a result of the surplus holding of presidency bonds with banks has declined as a result of larger credit score demand.

Banks are required to carry a specific amount of presidency bonds as a part of the statutory liquidity ratio and liquidity protection ratio necessities. In instances of weak credit score development, banks maintain authorities securities in extra of the required quantity. They promote these down when credit score demand picks up.

Niyogi of India Rankings mentioned {that a} March-end liquidity deficit of upto Rs 1.5 lakh crore may be managed by the RBI’s Liquidity Adjustment Facility, the place banks increase funds utilizing authorities bonds as collateral. “If the deficit goes up considerably above Rs 2 lakh crore there is no such thing as a hurt in persevering with these auctions, however banks could not have sufficient securities to park towards their borrowings from RBI,” he mentioned.

In the meantime, on Wednesday, the RBI mentioned it might infuse upto Rs 35,000 crore by long run foreign exchange swaps. The swaps give the central financial institution one other instrument with which to infuse liquidity, mentioned Madhavi Arora, economist at Edelweiss Securities.

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