Excess liquidity in the banking system back to pre-covid levels

Concerned over inflationary pressures in the economy, the Reserve Bank of India (RBI) is bringing down surplus liquidity in the system rapidly. It has fallen to pre-covid levels and almost 2 per cent of banks’ net demand and time liabilities (NDTL).

NDTL shows the difference between the sum of demand and time liabilities (deposits) of a bank (with the public or the other bank) and the deposits in the form of assets held by the other bank.

This sudden withdrawal of liquidity at a rapid pace has surprised banks since the central bank had earlier said it would bring down surplus liquidity in a multi-year time frame.

“The increase in the cash reserve ratio

(CRR), which came into effect on May 21, has sapped ~87,000 crore from the system.

In addition, the RBI is selling dollars and sucking out rupee liquidity, resulting in excess liquidity coming down rapidly,” said a treasury head of a public sector bank.

According to the RBI data, the daily liquidity absorption from the banking system was ~2.96 trillion on Monday, down from ~3.22 trillion on May 20 – a day before the CRR hike came into effect. About a month back, the liquidity absorption from the system was over ~5 trillion.

In a surprise move in early May, the RBI increased the repo rate by 40 basis points (bps) to 4.4 per cent. CRR was also hiked by 50 bps to 4.5 per cent.

Until early May, the liquidity in the banking system had been descending gradually. The daily liquidity absorption under the liquidity adjustment facility averaged ~6.8 trillion in the second week of April through May 12, moderating from ~7.5 trillion during the second fortnight of March through mid-april.

“Since the beginning of April, the RBI has hiked the effective policy rate (i.e., the standing deposit facility) by 80 bps. And the consensus is to raise it further by another 75 bps over the next two policies. Further, the liquidity surplus is already down to less than 2 per cent of NDTL in the past