Indian banking system’s liquidity could remain in deficit in the second half – analysts

An Indian rupee note is seen in this illustration photo from June 1, 2017. REUTERS/Thomas White/Illustration

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MUMBAI, Sept 21 (Reuters) – Liquidity in India’s banking system is expected to remain in deficit in the second half of the financial year as credit growth accelerates and the circulation of banknotes increases, analysts said.

The country’s bank liquidity fell into deficit on Tuesday for the first time in more than three years, according to data from the Reserve Bank of India.

A growing liquidity shortfall could push up short-term borrowing rates and prompt the Reserve Bank of India to pump money into the banking system through repo auctions and slow its market interventions currencies.

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“The start of the holiday season and the expectation of sequential improvement in economic growth would increase transactional demand for liquidity,” said Vivek Kumar, economist at QuantEco Research.

As a result, currency in circulation could jump from 2.2 to 2.4 trillion Indian rupees ($27.52 billion to $30.02 billion) in the second half of the financial year, Kumar estimated.

Meanwhile, government spending, which boosts market liquidity, has been slower than expected despite strong tax collections.

“This combination of a slow recovery in government spending and buoyant tax collection is reflected in the government’s cash balance,” said Gaura Sen Gupta, an economist at IDFC First Bank.

The fiscal year started with excess liquidity of over Rs 8 trillion at the start of April. The RBI said at the time that the withdrawal of cash would be a “multi-year” process.

On Tuesday, the systemic deficit stood at 218 billion rupees, its highest level since May 2019, with last week’s tax outflows also reducing liquidity.

According to QuantEco’s Kumar, the core systemic excess liquidity, which also includes the government’s cash balance, had peaked at 12 trillion rupees in September 2021, but has since declined sharply to 3.9 trillion rupees. .

More than half of this decline was due to RBI dollar sales to cushion the rupee’s fall, he estimated.

A negative balance of payments weighed on global liquidity.

India’s balance of payments showed a deficit of $16 billion in March 2022, with analysts expecting the gap to widen further in the coming quarters. A large deficit forces the central bank to sell dollars in the market, sucking up liquidity in rupees.

The RBI sold about $39 billion net of its foreign exchange reserves between January and July, with reserves shrinking to a two-year low of $551 billion as of September 9, the data showed.

“Unless we see a reasonable improvement in the balance of payments deficit, the liquidity crunch will continue to persist,” said Soumyajit Niyogi, head of India Ratings.

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The turnaround in liquidity pushed the overnight interbank rate above the policy rate by 5.4%.

“In the past, the RBI has announced forward repo auctions to ease liquidity pressures when the weighted average call rate exceeded the repo rate for a few days,” said Sen Gupta of IDFC First Bank. .

The RBI has stopped buying government bonds since October 2021 and analysts don’t see the central bank returning any time soon.

The central bank could reactivate fixed and floating rate repo windows, QuantEco’s Kumar said.

“With monetary policy in tightening mode, the likelihood of RBI making OMO (open market operation) bond purchases to boost liquidity is low,” Kumar added.

The RBI announced an overnight auction for Rs 500 billion after the market closed on Wednesday. The auction will take place on Thursday.

($1 = 79.9525 Indian rupees)

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Reporting by Dharamraj Lalit Dhutia; Editing by Dhanya Ann Thoppil and Saumyadeb Chakrabarty

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