Chart Of The Day: The liquidity glut is receding slowly

For the success of its fight against inflation, the Reserve Bank of India (RBI) not only needs policy rate hikes but also a liquidity surplus just enough to ensure flow of credit at reasonable cost.

Six months since the central bank vowed to reduce the liquidity glut, the surplus is reducing slowly. One accurate gauge of systemic liquidity is the RBI’s standing deposit facility (SDF) that it introduced in April this year.

The SDF represents the excess money that banks don’t find any lucrative route to deploy to and the interest rate offered by the central bank is the floor for the market. In April, banks had put in on an average Rs 1 lakh crore in the SDF on a daily basis.

The overall liquidity surplus at that time was a little over Rs 1.6 lakh crore, including the other term reverse repo operations of the RBI. This month so far, banks have parked on an average Rs 1.1 lakh crore at the SDF, marginally higher.

The liquidity surplus has not grown, but the money has shifted to the overnight SDF, an indication that banks are keeping excess funds at the very short term anticipating opportunities to lend.

To be sure, fortnightly term reverse repos still have a subscription of in excess of Rs 2 lakh crore. Frictional liquidity is reducing but the overall durable liquidity is yet to drop to levels comfortable for the central bank. Durable liquidity is mostly driven by the RBI’s forex intervention and its bond purchases. The sustained dollar outflows could soon put a dent here too.