24 Sep 2022 Banking system liquidity
Source: The Indian Express
News: Banking system turns cash deficit or liquid deficit for the first time since May 2019.On September 20, 2022,the banking system liquidity situation turned into a deficit mode of Rs 21,873.4 crore.
Concept of Banking system liquidity:
- It is easy availability of cash to meet short-term business and financial needs of banks.
- RBI injects or absorbs liquidity into or from the banking system through Liquidity Adjustment Facility (LAF).
- Liquidity deficit in Banking system happens when the banking system is a net borrower from the RBI under Liquidity Adjustment Facility (LAF).
- Surplus system liquidity happens if the banking system is a net lender to the RBI.
Factors responsible for deficit in banking system liquidity
- Improvement in demand for bank credit: According to recent RBI data, Bank credit growth accelerated to 14.2% in the quarter ended June 2022 from 6% in the same period of the previous year.
- Advance tax payments by corporations squeezed cash out of the banking system.
- Intervention of the RBI into the forex market to arrest the fall in the rupee against the US dollar.
- Incremental deposit growth not keeping pace with credit demand: According to the latest RBI data, the outstanding bank credit has increased by 4.77% in August 2022 compared to March 2022.However, deposit growth was just 3.21% during the same period.
Impact of tight liquidity condition on consumers:
- Rise in the government securities (a tradeable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation) yields.
- Example: On September 21, 2022, the 10-year government bond rate jumped to 7.23% from 7.18% on August 20, 2022.
- Higher Interest rates for consumers: A rise in the repo rate will lead to an increase in repo-linked lending rates and the marginal cost of funds-based lending rate (MCLR) of banks. Hence, higher cost of funds or loans to end consumers.
Possible way forward or Conclusion
- According to experts, RBI intervention should depend upon the nature of the liquidity situation.
- RBI might not have to act if the current liquidity deficit situation is temporary in nature as the funds will eventually come back into the system.
- But, the RBI might have to take measures to improve the liquidity situation in the system if it is long-term in nature.
Article: Express Explained: What banking system liquidity going into ‘deficit mode’ means.
Article Link: https://indianexpress.com/article/explained/explained-economics/explained-banking-system-liquidity-deficit-mode-8168219/
Yojna IAS Daily current affairs eng med 24th Sep
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