Banking system liquidity deficit at record high of ₹3.4 lakh crore

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Last Updated26/01/2024

The liquidity in the Indian banking system has reached a historic deficit of Rs 3.4 lakh crore.
This deficit is attributed to reduced government spending, higher tax outflows and slower bank deposit growth.

The primary reason for this liquidity deficit is reduced government expenditure.
The Goods and services tax (GST) outflow further impacted the liquidity.
Higher outflows from foreign portfolio investors (FPIs) have also led to the widening of banking system liquidity.
Bank deposits grew by 13% on a year-on-year (y-o-y) basis, while credit grew by 20%.
A large amount of retail deposits migrating to mutual funds has also resulted in a slower growth in deposits.

Banking system liquidity, as reflected by the amount of money injected by the RBI into the banking system, has been in deficit mode since last month.
On a net basis, the RBI has injected liquidity averaging Rs 1.8 trillion from December 16, 2023, to January 14, 2024.
The RBI has been conducting VRR auctions to infuse liquidity into the banking system, with the latest being a 15-day VRR worth Rs 2.5 lakh crore on January 24.

Analysts anticipate, RBI may announce permanent liquidity measures such as open market operations (OMO) purchases to ease liquidity deficit conditions.
- Instead of variable repo rate auctions (VRR) to infuse temporary liquidity.
Bankers analyse that RBI's may be reluctant to ease liquidity due to consumer-price inflation (CPI) persistently exceeding the 4% target.

Sustained tightness in the banking system liquidity could pose challenges for borrowers.
- It may worsen if government spending does not accelerate in a meaningful way.
The monetary policy stance should change to ‘neutral’ from ‘withdrawal of accommodation’ to maintain consistency of stance and action.