Major tax outflow has drained liquidity from the country’s banking system driving the liquidity deficit to a 4-year high, Reuters has reported after speaking to traders. On September 18, the liquidity shortfall rose to Rs 1.47 lakh crore or $17.67 billion, which is the highest since April 23, 2019. Cumulatively banks have borrowed Rs 1,97 lakh crore – a record amount – from the Reserve Bank’s margin standing facility service. The banking system is caught between two major outflows – one was due to advance tax payments and the other on account of GST. The two took place in the same fortnight. It came on top of a situation when a substantial part of the money is locked up to comply with the incremental cash reserve ratio (ICRR). The impact of the twin outgoes could rise to Rs 2.5 lakh crore, stated the report. Incidentally, scheduled commercial banks have to adhere to an ICRR requirement of 10%. RBI announced on September 8 that it would withdraw the ICRR requirement in phases that would make around Rs 1 lakh crore available to the banking system. It is expected to provide relief to the liquidity crunch and interest rates.
Listing out the factors impacting the liquidity position, economist with IDFC First Bank Gauru Sangupta said, “another drain on rupee liquidity could be from RBI’s FX intervention if depreciation pressures on the rupee persist.” On September 23, RBI is expected to release 25% of the funds under I-CRR. Another tranche of 50% will be released on October 7. The inflow of funds at the end of the month will start in the last week of September. Predictably, the liquidity crunch has maintained an upward pressure on overnight rates. Interbank call money and TREPS rate have stayed in the 6.75%-6.90% band. However, the chief economist at Kotak Mahindra Bank Upasna Bhardwaj said she expected the central bank to keep liquidity tight in the near term. The objective is to keep short-term rates elevated, given the pressure on the rupee and underlying inflationary risks. She added that it might prevent the central bank from announcing variable repo rate auctions. By the end of the month, the government is expected to resume spending. Around the same time, the ICRR requirements would stand withdrawn. The twin impact could shrink the liquidity deficit. Incidentally, in the beginning of August, liquidity surplus was at a 13-month high of Rs 2.8 lakh crore. But by the third week of August the situation turned into a deficit for the first time since the end of March this year.
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