India bank liquidity deficit hits record high

MUMBAI: India’s banking system liquidity deficit hit a record high, data showed yesterday, amid outflows towards tax payments and limited government spending, with traders anticipating that the central bank will infuse more cash to address the shortfall.

The deficit widened to 3.34 trillion rupees (RM190 billion) as on Jan 23, nearly tripling from the start of the month, data from the Reserve Bank of India (RBI) showed.

“The widening in deficit is a combination of rise in tax collections and a slowdown in government spending, which has been seen in the last few months,” said ICICI Securities Primary

Dealership head of research A. Prasanna.

Indian lenders have urged the RBI to ease liquidity conditions as overnight cash rates have stayed above the policy rate.

The call rate was at 6.85% and the TREPS rate was at 6.78% yesterday, both well above the repo rate of 6.50%.

So far, the central bank has conducted shorter-term repo auctions to infuse cash into the banking system but refrained from infusing longer term money.

“We think the RBI will keep liquidity in deficit mode in the near term, but keep reducing the size of deficit steadily going forward,” said Standard

Chartered Bank head of financial markets (India) Parul Mittal Sinha.

“We believe that easing liquidity conditions towards neutral would be interpreted as a precursor to rate cuts.”

Earlier this month, RBI governor Shaktikanta Das said it would be too premature to talk of a monetary policy pivot when inflation is still elevated.

Traders expect another short-term repo auction to be announced soon as three trillion rupees of outstanding repos will mature today.

“RBI will need to persist with variable rate repos to ensure liquidity demands are met,” said IDFC First Bank economist Gaura Sen Gupta. – Reuters