RBI steps in as liquidity deficit widens

Neha DaveMoneycontrol Research

In a bid to improve liquidity, the Reserve Bank of India on December 18 announced an increase in the amount of government securities that will be purchased under open market operations (OMOs) this month to Rs 50,000 crore from Rs 40,000 crore announced earlier. Further, assessing the need for durable liquidity going forward, the central bank announced liquidity infusion of Rs 50,000 crore through OMOs in January and said it will consider similar quantum of OMO purchases until the end of March 2019 depending on the evolving liquidity conditions.

Current liquidity scenario

Net liquidity of the banking system continues to be in deficit and widened to Rs 107,167 crores for the week ended December 14 despite RBI injection through OMO purchases of Rs 10,000 crore on December 13. This was the 10th consecutive week wherein the banking system has been faced with an overall liquidity deficit.

RBI injected Rs 36,000 crore and Rs 50,000 crore in October and November, respectively, taking the total liquidity infusion to Rs. 186,000 crore between April and December-end as alluded in the latest monetary policy statement.

Factors constraining liquidity

The widening of the liquidity deficit can be attributed to the higher fund demand by corporates to meet the advance tax payment deadline of December 15. The expansion in currency circulation driven by the festive season in November has also been a factor pressuring liquidity. Added to this, there has been an uptick in bank credit offtake with deposit growth slightly lagging which further aggravated the liquidity situation. Bank credit grew by 15.1 percent year-on-year (YoY), while deposit growth stood at 9.4 percent as on November 23. On an incremental basis (Apr 1- Nov 23 '18), bank credit has grown 5.9 percent, whereas bank deposits have grown by 3.4 percent.

Going forward, RBI’s action is likely to improve the liquidity situation, but the government borrowing (auctions) would still keep the overall banking system liquidity in deficit mode in the coming weeks.

Implications

Following RBI’s announcement, the benchmark 10-year G-sec yield declined to 7.27 percent, a level last seen in April 2018. The recent huge rally in G-sec yield is on the back of steep fall in crude prices, rupee appreciation, easing of inflation and expectations of dovish monetary policy going forward. That said, the concerns of overshooting FY19 fiscal targets and expected fiscal profligacy as we head closer to national elections will limit further fall in yields.

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