Need stable surplus liquidity to lower pressure on bank lending rates, ease financing: India Ratings

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Stability in surplus liquidity is needed to reduce the pressure on bank lending rates and ensure ease of financing, India Ratings said in a report on January 9.

The high volatility in the banking system liquidity also acts as a deterrent for commercial banks in terms of addressing adverse loan-to-deposit ratios and asset liability pricing, India Ratings said.

Though the overall liquidity in the banking system has improved year-to-date in FY25 as opposed to FY24, the volatility and subsequent impact on the domestic money market has been a key concern, especially with regard to undesired tightening of monetary policy conditions in the money market, the agency said.

Liquidity in the banking system came under pressure due to various factors, such as tax outflows and the RBI’s intervention in the forex market to stabilise the rupee.

The banking system saw outflows of over Rs 3 lakh crore as tax payments. On the other hand, the RBI intervention in the forex market, costing around $60 billion, to stabilise the rupee, also put pressure on liquidity.

Usually, when the central bank intervenes in the forex market, it sells dollars and buys rupee, which removes liquidity from the banking system. The intervention is done through banks and, hence, there is a always strain on liquidity in the banking system.

This has led the Reserve Bank of India (RBI) to record high level of funds through variable rate repo auctions.