Higher outflows from banking system sucks out liquidity infused via CRR cut

Reserve Bank of India

Higher outflows from the banking system in December has sucked out liquidity, which was infused through the cut in cash reserve ratio (CRR) by the Reserve Bank of India.

Experts said that the cut in CRR has helped the liquidity to remain in moderate deficit during the heavy outflow, which otherwise would have been higher.

“CRR cut has certainly helped otherwise the liquidity deficit would have been larger,” said Alok Singh, Group Head Treasury at CSB Bank.

He further added that the 50 basis points (Bps) CRR cut is not enough, another 50 bps cut is required to ease the pressure on banks which is reflected in significantly higher short-term lending rates.

Banking system has received liquidity worth Rs 1.16 lakh crore after the CRR cut by the RBI. The liquidity was infused in two tranches on December 14 and December 28.

The central bank has cut the CRR to provide support to the liquidity in the banking system, which was expected to witness heavy outflows because of advance tax and goods and services tax payments. The banking system witnessed outflows of over Rs 3 lakh crore on back of tax payments.

Currently, liquidity in the banking system is estimated to be in deficit of around Rs 1.83 lakh crore, as per RBI’s data.

The heavy deficit liquidity has pushed weighted average call money rate to trade over RBI’s repo rate on most days in December.

According to the RBI's data, weighted average call money rate remained in the range of 6.50-6.71 percent, which was almost 20 bps higher than the repo rate.

Usually, when the call money rate rises, it impacts the other short-term rates such as rates on commercial papers, certificates of deposit, and treasury bills.

Going ahead, liquidity is expected to remain tight and this will lead to higher call money rate. Former RBI Governor Shaktikanta Das, during post-policy press conference earlier this month, also said the central bank expects tight liquidity in the remainder of the financial year.

Anshul Chandak, Head of Treasury at RBL Bank said more liquidity support may be required if forex intervention by the RBI continues.