Analysts predict India’s banking system’s liquidity to stay in deficit for the second half: Report

According to economists, the second half of this fiscal year will likely see a continued lack of liquidity in India's banking system as loan growth and currency note circulation increase.

As per data from the Reserve Bank of India, the nation's banks liquidity fell into deficit on Tuesday for the first time in more than three years.

A growing liquidity gap would cause short-term borrowing costs to increase, forcing the Reserve Bank of India to reduce its currency market operations and use repo auctions to inject cash into the banking sector.

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Reuters quoted Vivek Kumar, an economist from QuantEco Research as saying, "the start of the festive season and expectation of sequential improvement in economic growth would increase transactional demand for cash."

According to Kumar, this might cause the amount of money in circulation to increase by 2.2–2.4 trillion Indian rupees ($27.52–$30.02 billion) in the second half of the fiscal year.

In the meantime, despite high tax collections, government expenditure, which increases market liquidity, has been slower than anticipated.

Gaura Sen Gupta, an economist of IDFC First Bank, told Reuters, "This combination of slow pick-up in government expenditure and buoyant tax collection is reflected in government cash balance."

Early April marked the beginning of the fiscal year with a liquidity surplus of more than 8 trillion rupees. A "multi-year" procedure will be involved in the removal of liquidity, the RBI had stated at the time.

The structural deficit reached 218 billion rupees on Tuesday, its largest level since May 2019, and the recent tax outflows further reduced liquidity.

The government's cash balance is included in the core systemic liquidity surplus, which Kumar claims peaked at 12 trillion rupees in September 2021 but has since dramatically decreased to 3.9 trillion rupees.

According to him, the RBI's dollar sales to counteract the rupee's decline account for more over half of this shortfall.

A negative balance of payments has affected liquidity generally.

As of March 2022, India's balance of payments was $16 billion in deficit, and analysts predict that the gap will continue to grow over the coming quarters. The central bank must sell dollars into the market due to a sizable deficit, which drains rupee liquidity.

Between January and July, the RBI sold a net amount of almost $39 billion from its foreign exchange reserves, causing the reserves to drop to a two-year low of $551 billion as of September 9, according to data.

According to Soumyajit Niyogi, director of India Ratings, "liquidity tightness will continue to persist unless we see reasonable improvement in the balance of payment deficit."

(With inputs from Reuters)

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