Highest liquidity gap in decade spurs speculation about RBI hand

The banking system cash deficit, as measured by banks’ borrowings from the Reserve Bank of India, was Rs 3.3 trillion ($38.2 billion) on Thursday, the highest since at least 2010

The liquidity deficit in the Indian banking system hit the highest level in over a decade following likely dollar sales by the central bank to curb rupee volatility.

The banking system cash deficit, as measured by banks’ borrowings from the Reserve Bank of India, was Rs 3.3 trillion ($38.2 billion) on Thursday, the highest since at least 2010, according to a Bloomberg Economics index. The RBI has been selling dollars through the past year to support the sliding rupee, according to IDFC First Bank Ltd.

Amid the cash crunch, large bond purchases by a group on Thursday that typically includes the central bank triggered speculation that the authority bought notes, said Debendra Dash, a fixed income trader at AU Small Finance Bank Ltd. in Mumbai.

The likely bond purchases may help add longer-term liquidity into the banking system and come amid reports that lenders requested the central bank in recent weeks to take stronger measures to ease the cash crunch. The RBI didn’t immediately respond to an email seeking comment.

The ‘others’ category, which usually includes the monetary authority, insurance and pension funds, made net purchases of government bonds worth 72.22 billion ($840 million) on Thursday, the highest since June 2023, Clearing Corporation of India Limited data showed.

The RBI has ramped up its liquidity support to help ease the cash crunch. Last week, it said it would conduct a daily variable repo rate auction on all working days.

The RBI will need to infuse liquidity more proactively, Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, wrote in a note.

The yield on the 10-year note fell one basis points to 6.72% on Friday and is down five points this week.